Uncovering the Truth: Dismantling the Inspection Contingency

 Cori Lamont  |    June 05, 2014

Year after year, class after class, call after call, WRA attorneys are inundated with discussions and questions relating to the Inspection Contingency. We have written Legal Hottips articles, presented workshops and included the discussion in CE, and this year we even dedicated an entire magazine to inspections.

So how do we give you a new perspective on a topic that provides so much conversation? Well, I could give you the same advice that Charles De Mar gave Lane Myer in the movie ‚ÄúBetter Off Dead‚ÄĚ when he was giving him skiing instructions as a first-time skiier: ‚ÄúGo that way, really fast. If something gets in your way ‚Ķ turn.‚ÄĚ

Instead, I have decided to provide you more helpful advice by presenting the top urban legends relating to the inspection contingency.

The following are the most common inspection contingency myths, presented in the order in which they appear within the contingency.

Myth #1: The inspection contingency covers both inspections and tests.

The Truth: The inspection contingency specifically states that it only authorizes inspections, not testing. (See line 410 of the WB-11 Residential Offer to Purchase). In order for the buyer to be permitted to test, the contract must include a testing contingency. For clarification as to the difference between an inspection and a test, look to the inspection and testing provision of the offer to purchase. (See lines 396-399 of the WB-11). 

For a better understanding of what to do when an inspection contingency includes testing, read ‚ÄúLet Them Inspect, Not Test‚ÄĚ in the June 2013 Wisconsin Real Estate Magazine at www.wra.org/WREM/Jun13/Inspection.¬†

Myth #2: Anyone can do the home inspection.

The Truth: Preprinted, the offer to purchase states that the offer is contingent upon a Wisconsin-registered home inspector performing a home inspection of the property. 

If the buyer wishes to hire a home inspector from another state, a contractor or the buyer’s sister for the home inspection, then the buyer should modify the offer to purchase to reflect this. If the seller does not agree, then the seller may choose to remove that language in a counteroffer. If the buyer does not modify the offer but still attempts to get someone other than a registered Wisconsin home inspector to do the home inspection, one of two scenarios could take place: 

1) The seller could arguably prevent the third-party individual from entering the home because the seller has not given that person permission to enter the home. (See lines 399-401 of the WB-11, which state, ‚ÄúSeller agrees to allow Buyer‚Äôs inspectors, testers and appraisers reasonable access to the Property upon advance notice, if necessary to satisfy the contingencies in this Offer.‚ÄĚ)¬†

2) If the buyer managed to get the third-party individual into the property and then tried to give an amendment or notice to the seller as to that individual’s determination about the property, the seller could argue that since the report did not come from a Wisconsin-registered home inspector, as stated in the inspection contingency, that the results and the report are irrelevant. 

Read Debbi Conrad‚Äôs article, ‚ÄúInspections and Infrared and Allergens, Oh My!‚ÄĚ ¬†to learn more about issues that arise when home inspectors offer testing services that fall outside the scope of a home inspection and some suggestions for trying to correct these situations.¬†

Myth #3: The blank lines in the inspection contingency are for anything and everything. 

The Truth: Information, if any, to be included on the blank lines relates only to specific property components that the buyer would like to have inspected by a qualified independent inspector or independent third party. 

The blank lines of the inspection contingency are not for the buyer to insert testing items, including ‚Äúall tests deemed necessary and appropriate as recommended by the home inspector‚ÄĚ or another phrase such as ‚Äúentire premises.‚Ä̬†

The blank lines are for property components that the buyer would like to have inspected by a qualified independent inspector or independent third party right out of the gate rather than waiting for a recommendation from the home inspector. 

For example, let‚Äôs assume the property on which the buyer is writing an offer has a swimming pool. Often home inspectors will not thoroughly inspect all parts of the swimming pool. The buyer however, would like someone who is a swimming pool expert to inspect the swimming pool with greater attention and expertise than the home inspector. Therefore, on the blank lines of the inspection contingency, the buyer would write ‚Äúswimming pool‚ÄĚ on line 413 of the WB-11.¬†

Myth #4: Contract language must be added or the contract must be amended to allow follow-up inspections. 

The Truth: The offer to purchase affords the buyer follow-up inspections that are recommended in a written report resulting from an authorized inspection. (See lines 416-417 of the WB-11). 

Therefore, as long as the written report from the home inspector, qualified independent inspector or independent third party listed on the blank lines of the inspection contingency recommends a follow-up inspection, then the buyer has the right to have that follow-up inspection. 

Note that the recommendation to have a follow-up inspection does not automatically extend the inspection contingency deadline. Therefore, any recommended follow-up inspection must be conducted before the deadline in the inspection contingency, or the buyer and seller will need to agree to extend the contingency deadline via an amendment.

Myth #5: The home inspector determines what is or is not a defect. 

The Truth: The offer to purchase defines ‚ÄúDefect‚ÄĚ for the inspection contingency.¬†

‚ÄúFor the purposes of this contingency, Defects (see lines 182-184) do not include structural, mechanical or other conditions the nature and extent of which Buyer had actual knowledge or written notice before signing this Offer.‚ÄĚ (See line 452 of the WB-11) The offer to purchase defines defect as ‚Äúa condition that would have a significant adverse effect on the value of the Property; that would significantly impair the health or safety of future occupants of the Property; or that if not repaired, removed or replaced would significantly shorten or adversely affect the expected normal life of the premises.‚ÄĚ (See lines 182-184 of the WB-11)¬†

Whether any item listed is actually a defect is determined on a case-by-case basis. If the parties cannot agree whether an item is a defect, as defined in the offer, then the parties should be directed to their respective attorneys for advice.

For a deeper discussion of the aftermath that happens when a transaction falls apart due to home inspection results, see ‚ÄúUncovering the Truth: Inspection Report When the Deal Falls Apart‚ÄĚ in the February 2014 Wisconsin Real Estate Magazine at www.wra.org/WREM/Feb14/UncoveringTheTruth.¬†

Myth #6: The seller is required to extend the inspection contingency deadline if buyer needs more time. 

The Truth: The inspection contingency deadline should provide the buyer sufficient time for the inspection, noted follow-up inspections in the inspector’s report, additional inspections of any component inserted on the blank lines, negotiations through amendments if necessary, and Notice of Defects if necessary. 

Licensees should remember that a short time frame will not provide the buyer sufficient time for all of the enumerated items to occur, especially if the home inspector is not able to get into the property right away. Additionally, licensees should keep in mind that the time frame is counted in days, running Monday through Sunday, meaning the time moves quickly. (See lines 419 ‚Äď 420 of the WB-11 stating, ‚ÄúCAUTION: Buyer should provide sufficient time for the home inspection and/or any specialized inspection(s), as well as any follow-up inspection(s).‚ÄĚ)

Running out of time may present a significant problem for the buyer. For example, if the home inspector gets into the property three days into the 10-day deadline, the home inspector’s report comes back after the deadline expires, or the buyer decides not to have the follow-up inspection recommended by the home inspector until after the deadline expires, the seller is NEVER obligated to extend the inspection contingency deadline. 

The buyer does not have a right to an extension of the home inspection contingency, but has the right to ask for an extension. The buyer may submit an amendment extending the deadline and submit it to the seller for the seller's consideration. However, if the seller doesn't sign and return that amendment before the deadline, then the deadline remains the same. 

If the deadline for the inspection contingency has expired and the buyer has not completed all of the inspections, has not reached an agreement with the seller by an amendment, or has not provided a Notice of Defects, then the buyer has agreed to purchase the property in that condition because the inspection contingency has been satisfied.

Myth #7: There is only one correct way to draft the right to cure provision in the inspection contingency. 

The Truth: There is no right or wrong way to draft the right to cure provision.

Licensees should explain the provision and discuss the buyer’s options. Below is an overview of the provision.

The buyer delivers to the seller a Notice of Defects and a copy of the inspection report. The right to cure provision is drafted to say:

  • Seller shall have the right to cure. The seller then has three options:
    1. Deliver to the buyer within 10 days written notice that the seller will cure the defects, thus keeping the offer alive. The seller must cure the defects in a good and workmanlike manner and deliver to the buyer a written notice detailing the work done within three days prior to closing.
    2. Deliver to the buyer written notice that the seller will not cure the defects. This option makes the offer null and void.
    3. Do nothing. This also makes the offer null and void.
  • Seller shall not have the right to cure. The offer is null and void.

Myth #8: A notice and an amendment are the same. 

The Truth: The notice and the amendment are distinctly different. 

The inspection contingency makes this distinction: ‚ÄúCaution: A proposed amendment is not a Notice of Defects and will not satisfy this notice requirement.‚ÄĚ (See line 424 of the WB-11).¬†

A WB-40 Amendment to Offer to Purchase is used when the parties are agreeing to modify terms; the WB-41 Notice Relating to Offer to Purchase is utilized when one party is giving notice that does not require the other party’s agreement.

A buyer wishing to negotiate terms after a home inspection would draft an amendment. If the buyer would like to provide a Notice of Defects, then the buyer would draft a notice and attach the inspection report. An easy way to remember to reserve the buyer‚Äôs negotiating rights is to think of, ‚ÄúA before N,‚ÄĚ ‚Äúamendment before notice,‚ÄĚ or 40 before 41.¬†

A Notice of Defects will activate the right to cure provision in the offer. Therefore, once a buyer provides a Notice of Defects, the situation is dictated by the right to cure language. Since the amendment is not a notice, the amendment provides the parties with the ability to negotiate terms without activating the right to cure provision.

The offer to purchase provides that the contingency is waived unless the buyer delivers to the seller, ‚Äúa copy of the written inspection report(s) and a written notice listing the Defect(s) identified in those report(s) to which the Buyer objects (Notice of Defects).‚ÄĚ (See lines 421-423 of the WB-11). Therefore, a copy of the written inspection report accompanies the buyer‚Äôs Notice of Defects. Even if a copy of the inspection report has previously been provided to the seller, best practice as a licensee is to provide a Notice of Defects with a copy of the written inspection report.¬†

For more discussion about using a notice or amendment, see Tracy Rucka‚Äôs article, ‚ÄúBest of Legal Hotline: Home Inspection Contingency Notice or Amendment?‚ÄĚ in the June 2013 issue of Wisconsin Real Estate Magazine, at www.wra.org/WREM/Jun13/Hotline.

Myth #9: The notice must be given before the amendment. 

The Truth: A buyer is not required to provide a notice prior to an amendment. 

In fact, a buyer wishing to negotiate terms would provide an amendment first. A buyer may also choose to skip the amendment process and go right to the Notice of Defects.

If the buyer provides a notice and the parties later decide they would rather negotiate the defect issue, the parties should document a withdrawal of the Notice of Defects with an amendment. Any amendment proposed after a Notice of Defects has been given should include a provision agreeing to the withdrawal of the Notice of Defects. If the amendment is signed, the Notice of Defects would be withdrawn and the parties would have agreed to certain repairs in the amendment. If the amendment is not signed, the Notice of Defects will be enforced.

Myth #10: When a buyer wants something repaired, use the notice and dictate the terms. 

The Truth: The inspection contingency provides that the buyer may give a written notice listing the defects identified in the report to which the buyer objects. It is not appropriate for the buyer to dictate how the seller will cure in a Notice of Defects. 

The seller’s obligations to cure are outlined in the offer to purchase (see lines 428-431 of the WB-11). If the buyer wishes to negotiate a certain method for repairing a defect, then an amendment is the appropriate tool.

Myth #11: A notice and an amendment are always given together. 

The Truth: Giving the notice and amendment simultaneously will cause a great deal of confusion and is not recommended. 

The path of least confusion would be to provide the amendment attempting to negotiate the terms, followed by the notice if the seller does not agree to the amendment terms. However, a buyer who is concerned about the time frame of the inspection contingency may supply both the amendment and notice at the same time if the buyer includes specific language; for instance, ‚ÄúThis Notice of Defects is effective only if the seller does not accept the buyer‚Äôs amendment dated ______ on or before ______.‚ÄĚ

Now that you know how to navigate the mountain that is the inspection contingency, you are armed with the proper skills to know how to ‚Äúturn.‚ÄĚ

Cori Lamont is Director of Regulatory Affairs for the WRA.

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