LEGAL CORNER: The 2022 Real Estate Market May Be Slowing But Buyers Are Still Waiving Critical Contingencies

On June 10th, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 8.6% in May from a year ago, which marks the highest increase since December 1981. [See https://bit.ly/3Hg0hZP]. The increase in inflation was much higher than expected and will continue to put downward pressure on the economy into the foreseeable future. Unfortunately, with inflation coming in above expectations, the Federal Reserve must continue on its path of increasing interest rates. Increased interest rates are already having a noticeable impact on the real estate market, which will continue in the coming months.

According to the National Association of Realtors in its monthly report issued on May 19th, existing-home sales fell for a third straight month through April. NAR reported that “Total existing-home sales, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, slid 2.4% from March to a seasonally adjusted annual rate of 5.61 million in April. Year-over-year, sales dropped 5.9% (5.96 million in April 2021).” Nevertheless, the inventory of available real estate remains at historically low levels, which continues to make this a “seller’s market.”

In the coming months, with demand easing, purchasers may begin to experience increased bargaining power, but for now, it seems that leverage will continue to remain with sellers. It is more critical now than ever before, for real estate agents and attorneys to question whether it is in the best interest of purchasers to waive inspection, mortgage, appraisal contingencies and sale contingencies in order to win a successful bid on a property.

The ‘Seller’s Market’ and the Pressures of the Marketplace on Purchasers

Throughout history, it has been common for purchasers to say they have found the “perfect house” or the “perfect neighborhood.” The common theme among purchasers is that they do not want to lose the house to other potential purchasers. In the current market, the fear of losing a house or being outbid is magnified and the stress level is significantly increased. Multiple offers are commonplace and offers by purchasers well above the listing price occur on a frequent basis. Not only do purchasers offer tens of thousands of dollars above the asking price, they are also willing to waive inspection, financing, appraisal and sale contingencies.

Sellers continue to put pressure on their listing agents to accept only those offers with no (or very few) contingencies or all cash offers. They instruct their agents to tell buyers and buyers’ agents they will not reduce their price no matter what comes up in any inspections (if they even allow inspections to be conducted). They inform the buyers’ agents that the transaction is strictly “as is” and indicate that the sellers will not address or remedy any issue that comes up, nor will they include any contingencies in the contract.

Unfortunately, because there is so little inventory, many purchasers are willing to waive these very important contingencies, and purchase a home without professional inspections being conducted. When this occurs, the buyer’s agent, to get the deal done, may be tempted to simply agree with them without explaining the full ramifications of such a decision.

Following the closing, if it is discovered that there exists, for example, an underground oil tank, oil spill, or dangerous levels of radon, purchasers will try to seek recourse from a seller (although case law and potential contract provisions will make this difficult), and will look to the purchasers’ attorney and real estate agents for recourse, especially if the cost of remediating these issues is high. It is critical for real estate agents and real estate attorneys to inform the client of all of the risks associated with making such a decision. It is also important for an agent to recommend that their clients consult with an attorney.

The Role of the Purchaser’s Real Estate Agent and Attorney

It is never appropriate for a real estate agent or attorney to recommend to a purchaser that the purchaser waive important contingencies, such as inspection, mortgage or appraisal contingencies just so the purchaser does not “lose the house.” A real estate agent, whether representing the buyer as a “client” or a “customer,” should never recommend or pressure any purchaser to waive critical contingencies. Real estate agents may find themselves being sued for breach of fiduciary duty (if the buyer is a client) or New York State’s covenant of good faith and fair dealing (if the buyer is a customer). Both real estate licensees and attorneys should disclose, in writing, that they advised buyers of the potential consequences of agreeing to any waivers.

New York law and customary “as is” provisions in the standard form of contract (and any riders annexed to the contract), will preclude a purchaser from pursuing an action against a seller with respect to, for example, the presence of an unknown underground oil storage tank, a leaking underground oil storage tank, lead based paint, a contaminated well, a failed septic system, asbestos in the premises, severe termite damage or other pest infestation, mold, high levels of radon or other issues.

The Concept of Caveat Emptor: ‘Buyer Beware’

The New York State Appellate Courts point out in various Appellate Division decisions (see Hecker v. Pashke (2015) (https://bit.ly/2VQ8uyQ); Daly v. Kochanowicz (2009) (https://bit.ly/2YiFxt0) and Jablonski v. Rapalje (2005) (https://bit.ly/2DViXyI)), that “In the context of real estate transactions, ‘New York adheres to the doctrine of caveat emptor and imposes no duty on the seller or the seller’s agent to disclose any information concerning the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent which constitutes active concealment.’” One critical takeaway from these “Caveat Emptor” decisions is that real estate agents should never infer or recommend that a buyer waive inspections or not undertake active and comprehensive due diligence.

Another notable decision issued by the Appellate Division for the Second Judicial Department in Comora v. Franklin (see https://bit.ly/2H90yk4) held that the seller and seller’s agent had no duty to disclose to the buyer, based on the doctrine of “Caveat Emptor” (i.e., “Buyer Beware”), the existence of humidity and mold in an indoor pool area of the home they purchased. The Comora case reaffirmed the doctrine of Caveat Emptor and emphasized that purchasers must be diligent and conduct thorough inspections of any property they wish to purchase. On the other hand, sellers, seller’s agents and the sellers’ attorneys must ensure that appropriate disclaimers are included in the contracts, that a purchaser is never “thwarted” from conducting inspections and that sellers never actively conceal a defect that would make its discovery impossible.

In addition to the standard “home inspection,” a buyer must be advised to have the following inspections conducted as well: radon, oil tank (for both underground and/or above ground tanks, including the recommendation of a metal detector test to locate the whereabouts of unknown tanks or other underground structures), lead paint, well and water, septic, asbestos, mold and termite/pest. Buyers in Westchester County, New York City and other local areas should be made aware that it is customary for inspections to be conducted before entering into a formal contract. And, although these contingencies are not normally included in the purchase contract, they are still considered contingencies of the transaction moving forward. If any issues do come up and a seller and/or purchaser decide not to proceed, the costs incurred for the inspections will be at the buyer’s expense.

The Consequences of Waiving Critical Financial Conditions

Purchasers have also been waiving critical finance, mortgage, appraisal contingencies, and/or sale contingencies. Real estate agents must ensure that purchasers understand, clearly and unequivocally, and preferably in writing, that unless they have the funds necessary to complete the purchase, should the financing fall through for any reason, they will likely forfeit their contract deposit, which can be significant (customarily 10% of the purchase price). Many times, buyers waive important financing contingencies based on loose and vague statements from mortgage representatives telling them not to worry about it—stating “we will get you the mortgage” without running the full application through the formal underwriting process.

Additionally, many purchasers are deciding to sell their current homes and wish to use the proceeds from the sale to complete their purchase. It is important for a purchaser’s real estate agent, as part of the initial negotiations, to inform the seller’s agent that a specific sale contingency provision must be included in the contract. Unless the purchaser has the full purchase price available in liquid funds, a sale contingency should never be waived.

There will certainly be push back from the seller’s agent and attorney, but if it is not included there are many unforeseen issues that could occur, which could cause the purchaser’s sale transaction to fall through. If a buyer’s sale transaction is conditioned on the buyer in that transaction obtaining a mortgage commitment and that buyer fails to obtain one and cancels that transaction, the purchaser would be in default and forfeit the down payment in the purchase transaction.

The Concept of ‘As Is’—Many Times Misunderstood

The concept of the “as is” transaction is commonly misunderstood by many of the parties in a real estate transaction. Even when buyers are permitted to conduct inspections, the seller and seller’s agent take the position that “no matter what comes up in an inspection, the deal is an “as is” deal and we will not negotiate the purchase price or remedy any issues.” Further, many sellers believe that even if an issue comes up after the contract has been signed, they are not required to remedy any such issues.

While most contracts include “as is” provisions, if an appliance included in the sale or other system (e.g., electrical, plumbing, sewer, septic, well, etc.) located on or at the premises was working at the time of an inspection, or at the time a contract was signed, then the standard contract provisions will still require that those appliances and systems be in working order at the time of closing. Sellers should be made aware that the “as is” concept does not mean they have no responsibility to ensure everything is in working order at closing. If, for example, there is a new leak in the plumbing, or there is new damage to the roof, that was not there at the time the contract was signed or at the time the property was inspected, then the seller would be required to remedy same prior to closing.

Similarly, a buyer should be informed of the “as is” concept as well because if they choose not to have inspections conducted, it will be difficult to establish whether an issue existed prior to the time the purchaser executed the contract. Below is an example of a disclosure an attorney or a real estate agent may make to the buyer-client:

It has been explained to you and you hereby acknowledge that New York State is a “buyer beware” state. Therefore, if you do not specifically request the seller (by asking us to include any such request in the contract of sale or a rider to the contract) to repair, remediate and/or replace: (1) any of the items or issues contained in any inspection report, or (2) any items or issues that you could have or should have discovered (whether or not contained in an inspection report, even where you have elected to waive your right to inspect the Premises), you will be required to take title to the Premises in its “as is” condition without recourse to the Seller for any such physical conditions, issues or items existing at the Premises.

However, in the event new issues, which did not exist at the time the Premises was inspected or at the time the contract was entered into, arise between the contract date and the closing date (the “Contract Period”) then a seller would be required to remedy same, provided it can be established by sufficient and objective proof that such condition did in fact arise within the Contract Period and not prior to the effective date of the contract or prior to the inspection. However, if there was no inspection conducted and no inspection report is available then it will be almost impossible to establish that the issue is new and the Purchaser will likely be required to accept the premises in its “as is” condition at closing.

The Unforeseen Consequences and Liabilities

Market conditions will sometimes force individuals to do things that they ordinarily would not do. Buyers, sellers, real estate agents and attorneys must be informed of all of the potential risks involved when waivers of important and critical contingencies are contemplated. While it is not recommended that buyers waive important contingencies, it is critical that they are aware of the pitfalls and risks associated with such waivers, and they make a knowledgeable and informed decision. Attorneys and real estate agents should never be in a position where they are recommending that an individual waives any contingencies, however, once they have made their recommendations against these waivers and have provided the client with the necessary information, the ultimate decision will be the purchaser’s.