Due Diligence-2017 AAR PC

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Introduction

  • Due diligence is one of the areas where the professionalism of an agent has a chance to shine.  It’s also where the inexperience or un-professionalism of the agent can manifest itself.
  • While the burden falls primarily on the seller in the warranties section of the contract the burden falls primarily on the buyer in the due diligence section.
  • What are the primary risks associated with the Due Diligence Section?
  • Failure to allow enough time to inspect
  • Failure to use qualified inspectors
  • Disputes due to  misinterpretations of the BINSR
  • Disputes due to improper use of the BINSR

Section 6.a Lines 213-224

section-6-a-lines-213-22

  •  Inspection period shall be (10) days unless otherwise specified
  • Inspection period is full calendar days
  • All inspections are at buyers cost

Buyer is called forth to inspect:

  • All desired physical and environmental investigations
  • All desired investigations to determine value and determine condition

Buyer is instructed to make all inquiries into property suitability:

  • Government agencies
  • Lenders
  • Insurance agents
  • Architects

Buyer directed to investigate all potential hazards, violations, and defects including:

  • Building codes
  • Zoning ordinances
  • Fire, health and safety codes
  • Buyer burdened to confirm all material MLS information
  • Buyer has the responsibility to discover the presence of any sex offenders
Quick Quiz

Fill in the Blank:
period shall be (10) days unless otherwise specified.

Seller is not required to disclose and therefore if material to the buyer the buyer must make inquiries regarding the following::

  • Disease
  • Natural death
  • Suicide
  • Homicide
  • Buyer promises to keep the property free and clear of any liens
  • Seller is indemnified and held harmless for the following when they arise from inspections.
  • Liability
  • Claims
  • Demands
  • Costs
  • Buyer responsible to repair all damage arising out of inspections
  • The buyer shall, upon receipt by the buyer-buyer to provide Seller with copies of all inspection reports
  • Buyer advised to consult the Buyer Advisory to assist in their due diligence investigations

If the home has been recently remodeled, the buyer should be encouraged to verify that the proper permits were obtained. Residential construction permits are needed when existing homes are remodeled or additions are made.  The common improvements requiring a permit include:

  • Room additions
  • Garage or carport conversions
  • Porch enclosures
  • Patio covers
  • Detached garages, sheds, gazebos or structures that are larger than 120 square feet in roof area
  • Fences or walls that are higher than six feet/retaining walls over four feet high
  • Installation or alteration of a driveway
  • Remodeling, repairs or additions that require electrical, mechanical, plumbing or structural changes
Quick Quiz

Fill in the Blank:

The shall, upon receipt by the buyer-buyer to provide Seller with copies of all inspection .

Section 6.b Lines 225-227

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If square footage is important to the buyer it is the buyers responsibility to investigate.

Discussion:

Agent lists an REO property for sale.  The square footage is correctly listed in the MLS.  The listing expires and the asset manager eventually reassigns the listing to another agent at the same brokerage.  Between two listing periods the county recorder’s office erroneously records a change in square footage based on the enclosure of a patio.  The permit and work was actually done on the neighbors home.  When the property was relisted by the second agent the agent uses the incorrect tax records to determine the square footage.  The difference in the square footage is 1300 SF actual vs. 1800 SF tax records.  The REO property is purchased with cash by an out of state investor.  No inspections are performed.  The investor fixes-up the property and enters into a contract with a buyer.  The buyers’ lender’s appraisal reveals the discrepancy in the square footage.   The buyer brings suit against the original listing broker for “damages”.

Section 6.c Lines 228-232

section-6-c-lines-228-232

If wood-destroying organisms are important to the buyer the buyer—OR—required by the lender it must be investigate d during the inspection period.

Who is responsible to pay for the termite inspection?

Answer: Buyer but is negotiable

Does the lender always require a termite inspection?

Answer: No

Does the lender always require a “clear” report?  

Answers: No

If a re-inspection is required in order to obtain a clear termite report, who is responsible for paying for the re-inspections prior to close?  

Answer:Buyer but is negotiable

What are the common “conditions” that can be called out in the termite report?

 

Answer: Faulty grade and or Excess moisture and or Dry Rot

If a termite infestation is found who is responsible to pay for treatment?  

Answer:Negotiable

The ten day inspection period has ended.  The lender won’t approve the buyer’s loan.  Can the buyer cancel the contract and receive a refund of their earnest money? Why or why not?  

Answer:Yes. Unfulfilled loan contingency

If you are representing the buyer and the buyer expresses deep concern over the possibility of the property having termites should you include additional language in the contract to address the buyer’s concern?

The contract adequately protects the buyer.

When representing the buyers should you add contingency language to the contract requiring the seller to produce a clear termite report?

Answer: No,  It may not be in the buyer’s best interest because the existence of such a clause may be interpreted as eliminating the buyer’s right to cancel if an infestation past or present is found.

Quick Quiz

Fill in the Blank:
Faulty grade and or moisture and or Dry Rot are the common “conditions” that can be called out in the termite .

Section 6.d Lines 233-236

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During the inspection period the buyer is required to determine:

  • If the property is located in a flood hazard area
  • The cost of flood insurance

What are the potential risks associated with purchasing a property in a flood hazard zone?

Answers:

  • The lender may require the purchase of flood insurance
  • The buyer’s ability to encumber or improve the property may be affected

Section 6.e Lines 237-240section-6-e-lines-237-240

If the ability to obtain homeowners insurance and/or the cost of homeowners insurance is important to the buyer the buyer is responsible to obtain written confirmation of the availability and cost of the insurance from the buyer’s chosen insurance company during the inspection period. (a.k.a insurance binder)

Quick Quiz

Fill in the Blank:

During the period the buyer is required to determine if the property is located in a flood hazard .

 

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