Real Estate Topics - Homeowner Inspections

Without exception – whether purchasing a resale home or new construction - a professional, licensed home inspector should be employed by the buyer(s) of residential property. New or used, a good home inspection can prove invaluable in deciding whether to proceed with the purchase at all, or whether to ask for repairs, or to ask for some other concession from the seller – perhaps a credit at closing so the buyer can have repairs or replacement done later at their discretion, or to have repair money to be held in escrow for later payment to a selected vendor.

The seller(s) of a house should also consider obtaining a full home inspection prior to, or at the time of listing their property for sale. They can then use the results of the inspection report to help guide them in preparing the house for sale and possibly making some repairs or upgrading components to make the house more salable. The information may also be useful in arriving at the proper listing price, or in disclosing material defects, or possibly offering an incentive to buyers by advertising a credit to be given at closing - to allow the buyer to make choices on repairing or replacing something found deficient. Make the inspection report available to prospective buyers. Have it on display in the home. Attach it to the Sellers’ Property Disclosure Statement (SPDS). If nothing more, this is certainly a demonstration of good faith, honest dealing and full disclosure.

For resale properties where an Arizona Association of REALTORS^®(AAR) Residential Resale Real Estate Purchase Contract is used, an Inspection Period is provided for in Section 6. Due Diligence. Almost two full pages, running from line 182 through 270 of the contract, are full of provisions regarding inspection and discovery of information about the property and the responsibilities of the parties to the contract. Though this article will primarily address issues limited to the home inspection, it will become apparent by reading through this contract language that there are additional investigations to be made, at the discretion of the buyer, during the “inspection period”.

The contract language is reprinted here – on the next four pages - without the contract line numbers:

Inspection Period: Buyer’s Inspection Period shall be ten (10) days or __________ days after Contract acceptance. During the Inspection Period Buyer, at Buyer’s expense, shall: (i) conduct all desired physical, environmental, and other types of inspections and investigations to determine the value and condition of the Premises; (ii) make inquiries and consult government agencies, lenders, insurance agents, architects, and other appropriate persons and entities concerning the suitability of the Premises and the surrounding area; (iii) investigate applicable building, zoning, fire, health, and safety codes to determine any potential hazards, violations or defects in the Premises; and (iv) verify any material multiple listing service (“MLS”) information. If the presence of sex offenders in the vicinity or the occurrence of a disease, natural death, suicide, homicide or other crime on or in the vicinity is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period. Buyer shall keep the Premises free and clear of liens, shall indemnify and hold Seller harmless from all liability, claims, demands, damages, and costs, and shall repair all damages arising from the inspections.

Buyer shall provide Seller and Broker(s) upon receipt, at no cost, copies of all inspection reports concerning the Premises obtained by Buyer. Buyer is advised to consult the Arizona Department of Real Estate Buyer Advisory provided by AAR to assist in Buyer’s due diligence inspections and investigations.

Square Footage: BUYER IS AWARE THAT ANY REFERENCE TO THE SQUARE FOOTAGE OF THE PREMISES, BOTH THE REAL PROPERTY (LAND) AND IMPROVEMENTS THEREON, IS APPROXIMATE. IF SQUARE FOOTAGE IS A MATERIAL MATTER TO THE BUYER, IT MUST BE INVESTIGATED DURING THE INSPECTION PERIOD.

Wood-Destroying Organism or Insect Inspection: IF CURRENT OR PAST WOOD-DESTROYING ORGANISMS OR INSECTS (SUCH AS TERMITES) ARE A MATERIAL MATTER TO THE BUYER, THESE ISSUES MUST BE INVESTIGATED DURING THE INSPECTION PERIOD.

The Buyer shall order and pay for all wood-destroying organism or insect inspections performed during the Inspection Period. If the lender requires an updated Wood-Destroying Organism or Insect Inspection Report prior to COE, it will be performed at Buyer’s expense.

Flood Hazard: Flood hazard designations or the cost of flood hazard insurance shall be determined by Buyer during the Inspection Period. If the Premises are situated in an area identified as having any special flood hazards by any governmental entity, the lender may require the purchase of flood hazard insurance. Special flood hazards may also affect the ability to encumber or improve the Premises.

Insurance: IF HOMEOWNER’S INSURANCE IS A MATERIAL MATTER TO THE BUYER, BUYER SHALL APPLY FOR AND OBTAIN WRITTEN CONFIRMATION OF THE AVAILABILITY AND COST OF HOMEOWNER’S INSURANCE FOR THE PREMISES FROM BUYER’S INSURANCE COMPANY DURING THE INSPECTION PERIOD.

Buyer understands that any homeowner’s, fire, casualty, or other insurance desired by Buyer or required by lender should be in place at COE.

Sewer or On-site Wastewater Treatment System: The Premises are connected to a: □ sewer system □ septic system □ alternative system.

IF A SEWER CONNECTION IS A MATERIAL MATTER TO THE BUYER, IT MUST BE INVESTIGATED DURING THE INSPECTION PERIOD.

If the Premises are served by a septic or alternative system, the AAR On-site Wastewater Treatment Facility Addendum is incorporated herein by reference.

Swimming Pool Barrier Regulations: During the Inspection Period, Buyer agrees to investigate all applicable state, county, and municipal Swimming Pool barrier regulations and agrees to comply with and pay all costs of compliance

with said regulations prior to occupying the Premises, unless otherwise agreed in writing. If the Premises contains a Swimming Pool, Buyer acknowledges receipt of the Arizona Department of Health Services approved private pool safety notice.

BUYER ACKNOWLEDGMENT: BUYER RECOGNIZES, ACKNOWLEDGES, AND AGREES THAT BROKER(S) ARE NOT QUALIFIED, NOR LICENSED, TO CONDUCT DUE DILIGENCE WITH RESPECT TO THE PREMISES OR THE SURROUNDING AREA. BUYER IS INSTRUCTED TO CONSULT WITH QUALIFIED LICENSED PROFESSIONALS TO ASSIST IN BUYER’S DUE DILIGENCE EFFORTS. BECAUSE CONDUCTING DUE DILIGENCE WITH RESPECT TO THE PREMISES AND THE SURROUNDING AREA IS BEYOND THE SCOPE OF THE BROKER’S EXPERTISE AND LICENSING, BUYER EXPRESSLY RELEASES AND HOLDS HARMLESS BROKER(S) FROM LIABILITY FOR ANY DEFECTS OR CONDITIONS THAT COULD HAVE BEEN DISCOVERED BY INSPECTION OR INVESTIGATION.

Inspection Period Notice: Prior to expiration of the Inspection Period, Buyer shall deliver to Seller a signed notice of any items disapproved. AAR’s Buyer’s Inspection Notice and Seller’s Response form is available for this purpose. Buyer shall conduct all desired inspections and investigations prior to delivering such notice to Seller and all Inspection Period items disapproved shall be provided in a single notice.

Buyer Disapproval: If Buyer, in Buyer’s sole discretion, disapproves of items as allowed herein, Buyer shall deliver to Seller notice of the items disapproved and state in the notice that Buyer elects to either:

(1) immediately cancel this Contract and all Earnest Money shall be released to Buyer, or

(2) provide the Seller an opportunity to correct the items disapproved, in which case:

(a) Seller shall respond in writing within five (5) days or ____ days after delivery to Seller of Buyer’s notice of items disapproved. Seller’s failure to respond to Buyer in writing within the specified time period shall conclusively be deemed Seller’s refusal to correct any of the items disapproved.

(b) If Seller agrees in writing to correct items disapproved, Seller shall correct the items, complete any repairs in a workmanlike manner and deliver any paid receipts evidencing the corrections and repairs to Buyer three (3) days or ____ days prior to COE Date.

(c) If Seller is unwilling or unable to correct any of the items disapproved, Buyer may cancel this Contract within five (5) days after delivery of Seller’s response or after expiration of the time for Seller’s response, whichever occurs first, and all Earnest Money shall be released to Buyer. If Buyer does not cancel this Contract within the five (5) days as provided, Buyer shall close escrow without correction of those items that Seller has not agreed in writing to correct.

Only a written agreement signed by both parties will extend response times or cancellation rights.

BUYER’S FAILURE TO GIVE NOTICE OF DISAPPROVAL OF ITEMS OR CANCELLATION OF THIS CONTRACT WITHIN THE SPECIFIED TIME PERIOD SHALL CONCLUSIVELY BE DEEMED BUYER’S ELECTION TO PROCEED WITH THE TRANSACTION WITHOUT CORRECTION OF ANY DISAPPROVED ITEMS.

Notice of Non-Working Warranted Items: Buyer shall provide Seller with notice of any non-working warranted item(s) of which Buyer becomes aware during the Inspection Period or the Seller warranty for that item(s) shall be waived. Delivery of such notice shall not affect Seller’s obligation to maintain or repair the warranted item(s).

Home Warranty Plan: Buyer and Seller are advised to investigate the various home warranty plans available for purchase. The parties acknowledge that different home warranty plans have different coverage options, exclusions, limitations, service fees and most plans exclude pre-existing conditions.

□ A Home Warranty Plan will be ordered by □ Buyer or □ Seller with the following optional coverage______________________________, to be issued by ____________________________ at a cost not to exceed $ ______________, to be paid for by □ Buyer □ Seller

Walkthrough(s): Seller grants Buyer and Buyer’s inspector(s) reasonable access to conduct walkthrough(s) of the Premises for the purpose of satisfying Buyer that any corrections or repairs agreed to by the Seller have been completed, warranted items are in working condition and that the Premises is in substantially the same condition as of the date of Contract acceptance. If Buyer does not conduct such walkthrough(s), Buyer releases Seller and Broker(s) from liability for any defects that could have been discovered.

Seller’s Responsibility Regarding Inspections and Walkthrough(s): Seller shall make the Premises available for all inspections and walkthrough(s) upon reasonable notice by Buyer. Seller shall, at Seller’s expense, have all utilities on, including any propane, until COE to enable Buyer to conduct these inspections and walkthrough(s).

So, the contract language is fairly comprehensive and straightforward – and works well for resale properties.

New construction however, is a whole different ball game. Buying new can be a great decision – there are lots and lots of benefits to new construction. There may also be some disadvantages. For one, the AAR contract is not used. Each builder/developer has their own contract – and none of them are quite so favorable for the buyer. Careful review and a thorough understanding of any documents signed are essential. It may be necessary to negotiate and have special language written in to allow for a full inspection by an independent inspector. New construction sales representatives in a subdivision have sometimes been known to discourage buyers from using an independent home inspector or even to tell people that they cannot use one. Well, that’s just nonsense. Every buyer is entitled to an inspection of the property for defects and issues prior to closing the sale. The process may work a little different on new construction, but the consumers’ rights are still there.

Often, the only standard provision for inspection in new construction is a final walk-through just before closing with the builder’s representative to write up a “Punch List”[1] of items requiring some attention. Though this is an important step in the process, it doesn’t come close to providing the in depth information that a proper home inspection may. Always insist on the ability to have an independent inspector involved in your purchase by helping you prepare the Punch List.

If you are having your house built (as opposed to purchasing a “spec” home that is already constructed), it would be a great idea to have the inspector periodically checking on key points during the construction process and reporting their findings to you – preferably with photographs. Perhaps at the time of foundation layout and concrete pouring, framing, roofing, electric, gas and water line installations, dry walling, flooring, etc. – any key points during the construction. Think about how photographs taken during the various stages of construction might prove useful several years later. It could be very helpful to know where the plumbing and electrical lines are run within a wall or the ceiling.

To some it may seem a waste of time and money to hire an inspector on new construction. After all there is the builder warranty if something is found to be defective. Well, this is true, however, their can be all kinds of things that are detected initially that can cause a variety of problems later. Here are just a few examples of things that have actually happened with newly constructed homes.

This author’s own experience with a newly built town home in Leesburg, Virginia is a perfect example. The property was a nice two story house with an unfinished basement, two bedrooms and two baths on the upper level. After the second night of living in the home, a huge bulge in the ceiling of the dining room was noticed – and it was dripping water. The builder’s plumber had not properly connected the drain pipe from the master bedroom shower. What a huge inconvenience that took a full week to recover from – not to mention the damage done to dining room furniture and the brand new carpeting and the time missed from work. Also, on the same property, about six months after moving in, an incredible period of rainy weather saturated the ground to a point that an unnoticed crack in the basement wall leaked and filled the basement with about two feet of water.

Other stories include electrical outlets found to not be connected to any wires. A variety of building code violations are often discovered. Tiles roofs are very often installed incorrectly. It is sad but true that there just doesn’t seem to be much pride of workmanship with many of the “crafts people” working in today’s homebuilding business.

With the median price of a home in Tucson close to a quarter of a million dollars, an investment of less than $500 in a good home inspection should be a no-brainer.

In theory, a home inspection should reduce or eliminate some of the stress associated with buying a home. In reality however, many times the inspection results in causing stress for the buyer and seller alike. That certainly isn’t the goal of the inspector - it is perhaps just the natural result of any close scrutiny. It is important to keep things in perspective. There is no perfect house. A good inspector will always find something to point out. Different companies use slightly different methods of rating findings, but all will have some way of ranking the significance of their findings, e.g., poor, fair, good, etc. Also, some issues will be cosmetic, some very minor defects, some major, and some things may be a significant safety hazard. Naturally, the issues that are major defects and/or safety hazards need to be addressed.

Depending on the size and complexity of the property, the cost of an inspection can run from about $200 to $500 or more. Also, optional inspections of things like swimming pools and spas, special outbuildings, etc. can add to the base cost. It may be useful to do some price shopping between inspectors, but perhaps more important than the tens of dollars difference in fees between companies is the difference in the experience and reputation of the actual inspector that will do the work.

Minimally, a thorough home inspection should cover the following major areas of concern:

Selecting the inspection company/inspector can be a significant challenge in itself. Fortunately, there are some minimum standards to look for.

Arizona does require licensing of home inspectors. Title 32, Chapter 1 of the Arizona Revised Statutes was enacted in 2002. To obtain a license an individual must complete 80 hours of training, pass both a national and state exam, and conduct 30 parallel inspections. Licensing is handled by the Arizona State Board of Technical Registration, 1110 W. Washington St., Suite 240, Phoenix, Arizona 85007, Phone: (602) 364-4930, Fax: (602) 364-4931, E-mail: info@azbtr.gov. Their website, http://www.btr.state.az.us/home.htm, can be accessed to check on the license status of individual inspectors.

In addition, the law requires that certified home inspectors have one of the following financial assurances: 1) Errors and Omissions Insurance in the amount of $200,000 in the aggregate and $100,000 per occurrence, 2) a $25,000 bond or proof of assets in that amount, or 3) an alternate financial assurance mechanism approved by the BTR with a value of at least $25,000. The law states that loss of or failure to obtain financial assurance is grounds for revocation of certification.

It might be a good idea to confirm that the inspector chosen does have adequate and current coverage. It will also be good to know what type of “warranty” is provided with their service.

Another measure of competence may be that the inspector is certified by the American Society of Home Inspectors (ASHI). ASHI certification can be determined on their website: http://www.ashi.org/.

There is also the National Association of Certified Home Inspectors to check: http://www.nachi.org/.

And yet another certification body, the National Institute of Building Inspectors: http://www.nibi.com/.

And finally, don’t underestimate the power and usefulness of word-of-mouth reputation. Ask around. Consider what your real estate agent may have to say about various inspectors.

Some of the home inspection companies will allow the buyer of the property to take advantage of the inspection that may have already done on a property by the seller. Usually for an additional fee (less than the cost of the inspection already paid for by the seller) the home inspector will meet the buyer at the property, give them a copy of the inspection report that has already been done, walk through the property and go over the findings in the report and offer guidance and answer questions. They will then typically extend their full warranty regarding the inspection to that buyer.

Understand that even though your real estate agent may have been the one to recommend the inspector, maybe even made the phone call to schedule the appointment, the inspector is working for you. You are the one retaining the service and paying for it. You should absolutely be present during the inspection. You have every right to ask questions and monitor the inspection procedures. However, be respectful of the fact that the inspector has much to do and needs to pay attention and think about what they are doing. This is not a job like making fudge at a resort shop where they have a song and dance routine to entertain you with while they work. Don’t ask so many questions and hover so closely as to adversely affect the quality of work that can be done. A good inspector will point important things out to you as they go along. Or, they may wait until they are done to go back over those findings. They should always provide you with a complete written report. Some will have the option of emailing it to you if you prefer.

Naturally, though every inspector is going to follow an established procedure for conducting the inspection, they are each going to have their own personality and manner of conduct and interaction with the sellers and buyers. Some inspectors develop reputations as “deal killers” in the real estate community because they have a way of making mountains out of molehills and scaring buyers away from properties unnecessarily. Other inspectors seem so cavalier that you wonder whether they really know what they are doing or care. It may be well worth the effort to try to personally interview several inspectors to find one with a personality and style compatible with the buyer or seller.

One peculiar difference among inspectors seems to be their position on evaluating the Heating Ventilating and Cooling (HVAC) system. This somewhat controversial issue that has surrounded home inspections is over the advisability of operating the air conditioning unit in cool weather. In Tucson, cool weather means below 65 – 70° F. Many home inspectors advise against, or refuse doing this evaluation unless warmer temperatures prevail – and they each seem to have their own “critical temperature”. Other home inspectors don’t seem to think it is a problem and go ahead and run the AC unit regardless of outside temperature.

Interestingly, this author attempted to find definitive guidance on which position is correct and ran into quite a challenge. Finally, with significant help from the local owner of the Housemasters franchise, William Craft, the following information was found in the National Institute of Building Inspectors Training Manual (published in August 2002), in Section 1121.1 Cold Weather and Air Conditioning Systems:

It is commonly known that central air conditioning systems should not be operated in cold weather. The fact that cold weather operation limits the inspector’s ability to readily assess the unit’s operating condition is usually understood. But why the unit shouldn’t be operated from a mechanical standpoint may not be as clear.

First, the compressor shell of residential air conditioners serves several purposes. It serves as an oil sump for the entire system and normally has a couple of inches of oil at the bottom. Second, it also serves as the suction manifold for the compressor. When the compressor starts up, the first place the pressure drops is in the compressor shell.

Second, the refrigerant has an affinity for cold and for oil. In cold weather, it migrates to the coldest spot in system - which is the compressor/condenser area. Once in the compressor it becomes absorbed in the oil. As a result, in a typical residential compressor in mid-winter, the oil level may be 4 inches instead of 2 inches - but the added 2 inches is actually the refrigerant dissolved in the oil.

Under these conditions, if the compressor is started and the pressure within the compressor shell drops, the dissolved refrigerant literally “explodes” up out of the oil, causing the oil to froth and foam much as Coke does when it is vigorously shaken. The entire compressor shell is filled with big droplets of oil flying about in all directions. If one of these big droplets gets sucked into the compressor, nearly filling a cylinder, it cannot be compressed (liquids cannot be compressed, only gases). If this happens, the compressor either bends a connecting rod or breaks a valve or piston - but in any event it suffers catastrophic failure. This is usually apparent, the compressor may not run at all, or it may clank and rattle or run quietly but doesn't do any work.

More often, however, no large droplets are sucked into it cylinder. Instead, enough small droplets are sucked in and discharged through the rest of the system that there is not enough oil left in the compressor to lubricate it. Consequently, it becomes “oil starved" and its bearings are scored or destroyed. This may be less apparent than the catastrophic failure and the compressor may actually operate marginally for a while, but from that point on, it is on the way to eventual failure.

Manufacturers of residential units combat this in two ways. First, their literature warns not to operate the system below certain temperatures (stated minimums typically vary from 45 to 55º F (7 to 13° C). Unfortunately, the specific temperature limitations are seldom clearly visible on the unit or any of its components for the inspector or homeowner to see. But even though not readily apparent, it is a valid restriction and one of the reasons that the air conditioner should not be tested if the outside air temperature is below the 55-60° F (13-16° C) range. The other reason is that at such low temperature a valid inspection of the system could not be performed.

The other way manufacturers try to combat this problem is to wrap a heater around the base of the compressor. Most older, top-of-the-line models will have such a heater. Almost all units manufactured since 1985 will also have one. It is a common resistance heater, usually with a value of 60 to 100 watts.

In moderately cold temperatures, approximately 40-55° F, this heater will keep the oil sump area at a high enough temperature to prevent the refrigerant from migrating to this point. This minimizes the chance of a problem occurring when a unit is run at the lower temperatures.

This also gives the homeowner (and inspector) some leeway in the event temperatures fluctuate moderately (particularly in the early spring and fall). Still the unit should not be operationally tested below 60° F or any other specific temperature state by the manufacturer of the unit being inspected.

Another caution related to the cold weather factors and the heater has to do with the pre-inspection status of the electric supply to the unit. If the fuse or current breaker to the unit is disconnected, there is no power to energize the sump heater.

This is the reason that is generally recommended (and specifically stated by many manufacturers) that the power be on 12-24 hours prior to operation. This would allow enough warming of the sump area by the heaters to minimize the likelihood of excess refrigerant at the sump area at start-up.

Accordingly, it is recommended that an electric central air conditioning system not be operated when ambient temperatures are below the 55-60° F (13-16° C) range or if the power to the system has not been on for 12-24 hours prior. If the time or temperature factors are borderline, the inspector must use discretion.

For example, if the temperature briefly drops to 50° F the night before testing, little harm is likely as long as the temperature has risen by the time it is tested. On the other hand, temperatures below freezing for an extended time the prior night would likely mean that the sump heater would not heat up the compressor sump high enough even though afternoon temperatures rose to 75° F. Or, to consider a third scenario, when the power to the unit was only turned on 2 hours before the test, safe operation is likely, provided temperatures have remained above 60-65° F for an extended period of time.

To summarize, when inspecting/operating an electric central air conditioning system, heed the manufacturer’s instructions and generally accepted guidelines related to unit operation. Do not operate below 60-65° F and do not operate the unit if it has not been energized for 12-24 hours prior or as the manufacturer may otherwise recommend.

Also, Carrier^®, as an example of one air conditioning equipment manufacturer’s precaution in their Owner’s Information Manual, gives the following precaution:

Your outdoor unit is not designed operate when outdoor temperatures are lower than 55º F without modification. If operation below this temperature is required, consult your Carrier dealer.

A complete Infinity System with low ambient temperature cooling capability can operate down to 0º F outside temperature when properly set up.

And, from Robertshaw^® – a large manufacturer of thermostatic controls used on many HVAC systems – the following admonition from one of their User Manuals:

CAUTION: DO NOT SWITCH SYSTEM TO COOL IF THE TEMPERATURE IS BELOW 50º F (10º C). THIS CAN DAMAGE THE AIR CONDITIONING SYSTEM AND CAUSE PERSONAL INJURY.

So, it will be important to discuss this subject with the chosen home inspector to ascertain what their practice will be – and who will be responsible for any damage that may result from operating an air conditioner in cooler weather.

Home inspectors may include a cursory inspection of the roof – depending on what type of roof and the inspector’s policy. Many inspectors will not walk on a tile roof because of the risk of breaking tiles. It may be advisable to bring in a licensed roofer for a closer examination in those cases.

Normally, not included in the standard home inspection - but usually available at additional cost - may be a pool / spa inspection, radon inspection, and water quality testing and evaluation. You may also want to consider testing for lead-based paint if the home was built prior to 1980. A property survey may also be a wise thing to do. And, naturally, you will want a pest inspection conducted – especially to check for evidence of termites.

Any and all investigation, inspection, testing, questioning, etc. needs to be accomplished during the prescribed inspection period. Period. The buyer gets one bite at the apple.

The following four pages contain interpretive and insightful information about home inspections and our Purchase Contract provisions which was written by Michelle Lind, Esq., General Counsel for the Arizona Association of REALTORS^® (AAR), and is taken directly from their website:

Inspection period issues in the Residential Contract
by K. Michelle Lind
Posted: June 2005

The Inspection Period in the AAR Residential Resale Purchase Contract (5/05) (“Contract”) allows the buyer ten days (or as otherwise provided) after Contract acceptance to:

Prior to expiration of the Inspection Period, the buyer may deliver to the seller a signed notice of any items disapproved in the buyer’s sole discretion (Section 6i). If the buyer disapproves of items, the buyer must elect to either cancel the Contract or provide the seller an opportunity to correct the items.

If the buyer provides the seller an opportunity to correct the items disapproved, the seller must respond within five days (or as otherwise provided). If the seller agrees in writing to correct any of the items, repairs must be completed in a workmanlike manner and any paid receipts delivered to the buyer three days (or as otherwise provided) prior to the close of escrow date (Section 6j, lines 241-243).

If the seller is unwilling or unable to correct any of the items disapproved, the buyer may cancel the Contract within five days. If the buyer does not cancel the Contract, the buyer is obligated to close escrow without correction of those items that the seller has not agreed in writing to correct (Section 6j, lines 244-248).

If the buyer discovers any non-working warranted item(s) during the Inspection Period, the buyer must give the seller notice. The warranted items include: all heating, cooling, mechanical, plumbing, and electrical systems (including swimming pool and/or spa, motors, filter systems, cleaning systems, and heaters, if any), free-standing range/oven, and built-in appliances. The buyer may provide this notice on the Buyer’s Inspection Notice and Seller’s Response form (“BINSR”). If the buyer discovers a non-working warranted item during the Inspection Period and fails to provide the notice, the seller will be released from the obligation to repair the warranted item.

Tip: Always provide the buyer’s Inspection Period Notice on AAR’s BINSR form for uniformity of practice. The BINSR provides both parties additional information on the inspection and notice of disapproval process and contains provisions for the buyer’s notice, the seller’s response, and the buyer’s election, as well as a space for notice of non-working warranted items

Must all Inspection Period items disapproved be provided in a single notice?
Yes. All desired inspections and investigations must be conducted prior to delivering the notice and all Inspection Period items disapproved must be provided in a single notice (Section 6i).

Tip: If the buyer elects to allow the seller an opportunity to correct the items disapproved, the buyer should state in the notice how the item must be corrected. For example, if termites are found, must the entire house be treated, or is spot treatment sufficient? If a roof condition is an item disapproved, state the extent of the repair requested or whether only replacement will suffice.

If the buyer elects to cancel the Contract, must the buyer give written notice of what items the buyer disapproves?
Yes. If the buyer disapproves of an item, the buyer must deliver to the seller written notice of the items disapproved and state in the notice that the buyer elects to cancel (Section 6j, lines234-235).

Is the buyer entitled to disapprove of cosmetic items?
Yes. The buyer may disapprove of items in the buyer’s sole discretion (Section 6j, Line 234). Of course, both parties are always obligated to act in good faith and the buyer’s disapproval rights are no exception to that rule.

Tip: If the buyer elects to cancel the Contract, list all the items of which the buyer disapproves in the Inspection Period Notice.

Can the buyer demand a reduction in the purchase price in lieu of providing the seller an opportunity to correct the item disapproved?
No. The Contract provides that the buyer may either elect to immediately cancel the Contract or provide the seller an opportunity to correct the items disapproved.

Tip: If the buyer wants a reduction in purchase price in lieu of repairs, the buyer should obtain several bids to determine the cost of the repairs, negotiate the reduction, and reduce the modification to writing prior to delivering the Inspection Period Notice.

What if the buyer does not give written notice to the seller during the Inspection Period?
The buyer’s failure to give the seller written notice of items disapproved during the Inspection Period is deemed to be the buyer’s election to proceed with the transaction and close escrow without the correction of any property items (except for warranted items) Section 6j, lines 251-253).

What happens if the seller fails to respond to the buyer’s written notice of items disapproved?
The seller’s failure to respond is deemed a refusal to correct any of the items disapproved (Section 6j, lines 239-240). In such case, the buyer has five days after the expiration of the time period for seller’s response to elect to cancel the Contract or proceed with the transaction without the correction of the items disapproved (Section 6j, lines 244-246).

What if the seller agrees to correct some, but not all, of the items disapproved?
The buyer has two options: cancel the Contract or accept the property with the correction of only those items seller agreed in writing to correct. If the buyer wishes to continue to negotiate the items, the buyer must get a written agreement extending the time periods for cancellation or the buyer will be obligated to close escrow without correction of the items that seller has not agreed to in writing, even if the parties continue “negotiating” (Section 6j, lines 249-250).

Tip: For example, these time periods may be extended with the following agreement:

Seller is currently unwilling to correct the following items disapproved by Buyer: ____

Pursuant to the Contract, Buyer is entitled to cancel this Contract on or before ___.

Buyer and Seller hereby agree to modify the Contract and extend the Buyer's right to cancel this Contract and receive the return of all earnest money until __ to allow the parties additional time to address the items disapproved.”

For additional examples go to www.aaronline.com/documents/language_disapp.aspx.

Can the buyer change the buyer’s election once the election has been made?
Probably not. If the buyer reasonably disapproves of items, the buyer must state in the notice that the buyer elects to either immediately cancel the Contract or provide the seller an opportunity to correct the items. If the buyer gives the seller an opportunity to correct the items, the buyer has made the election and can no longer “immediately cancel” the Contract. To avoid this dilemma, make sure the buyer has taken the time allotted to perform all inspections and investigations and has thoroughly considered the options before making an election.

If the buyer gives notice to the seller of a non-working warranted item, is the seller entitled to refuse to repair the item?
No. When the buyer and seller enter into the Contract, the seller agrees that the warranted items will be in working condition at close of escrow (Section 5a). The buyer’s notice that one of these items is not working does not change the seller’s obligation to repair the item and deliver it in working condition at close of escrow (Section 6k).

What happens if the buyer discovers a non-working item during the Inspection Period but does not notify the seller?
The Seller warranty for that item is waived. In other words, the seller will not have to repair the item.

What if there is a non-working warranted item that the buyer does not discover during the Inspection Period?
If the buyer does not discover the item during the Inspection Period, the buyer cannot give the seller notice. Therefore, the seller continues to be obligated to repair the item and deliver it in working condition at close of escrow.

What happens if the seller fails to make the agreed upon repairs?
If the seller fails to complete the repairs three days prior to the COE Date and the buyer immediately delivers the cure notice, the seller will be liable for breach of contract and breach of warranty if the repairs are not complete by close of escrow.

The Contract clearly sets forth the procedure for the Inspection Period Notice and seller’s response. Brokers should be familiar with the process and insure that a signed writing evidences any agreed upon deviation in the process.

Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts.

Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.

John P. Hale is Owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745. He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000. In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®: ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, e-PRO, and GRI – Graduate Realtor Institute. And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.

Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel. Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.

[1] The origin of this descriptive phrase is uncertain, but there is an interesting story that suggests each subcontractor employed during the home’s construction used to use hand held hole punch tools that made specific shaped holes. The subcontractors would use their uniquely shaped tool to “punch” the list of items that had been completed by their company as their way of “signing off”. Though this practice has not survived, the term is still in use today.