Having a transaction fail to close because of the inspection is usually not a desirable outcome, but it is also not that unusual. Often when a buyer has an inspection and the inspector finds defects, the seller is learning in real time, along with the buyer and the agents, about property conditions that were previously unknown to the seller. Surprise! Now everyone has new information. What happens next? 

Must the seller amend their condition report?

If the seller has notice or knowledge of a defect, the seller is obligated to disclose this. The real estate condition report (RECR) defines a “defect” as “a 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.” Wis. Stat. § 709.035 requires sellers to amend the RECR, prior to the acceptance of a contract, when they obtain information or become aware of any condition that would change a response on the RECR. This means that if a seller learns new information that would change one of their answers on their RECR, and the seller does not currently have an accepted offer, the seller is supposed to amend their RECR or complete a new one. If a seller is going to amend their RECR, the seller can use the WRA’s Amendment to Condition or Disclosure Report form.

Seems straightforward, right? New information for the seller should mean new disclosures from the seller. The challenge with this is sometimes the seller does not agree that items noted as defects in the inspection report really are defects, so the seller might resist amending the RECR or might amend the RECR to disclose some defects but not all. The listing agent then must decide whether the items noted as defects are material adverse facts or information suggesting material adverse facts that the agent is required to disclose. 

An adverse fact:

• Has a significant adverse effect on the value of the property.
• Significantly reduces the structural integrity of the property.
• Presents a significant health risk to the occupants of the property.
• Or is information that indicates that a party to the transaction is not able to or does not intend to meet their obligations under the contract.

If the condition meets this criteria, then the issue constitutes an adverse fact.

If a party to the transaction were to so indicate, or if a competent licensee would generally recognize that this fact is of such importance that it would affect a reasonable party’s decision to enter into a contract or would affect the party’s decision about the terms of the contract, the fact is both adverse and material. If this fact is both adverse and material, then Wis. Admin. Code § REEB 24.07(2) requires the licensee to timely disclose the fact in writing to all parties to the transaction, even if the client would direct the licensee not to disclose. The duty to disclose has priority over any duty owed to the client. The agent can use the WRA Disclosure of Material Adverse Fact form to disclose. 

Rather than amending the RECR or tasking the agent with disclosing information, the seller could fix the items labeled as defects in the buyer’s inspection report. If the items are sufficiently corrected and they no longer meet the definition of defect, the seller would not need to amend the RECR.

Sometimes though, the seller’s “fix” of a condition that the inspector labeled a defect could be questionable in the eyes of the listing agent, putting the listing agent back into the position of deciding whether the agent now has a material adverse fact or information suggesting a material adverse fact that must be disclosed in writing to all parties. 

Must the seller provide future buyers with a copy of the previous buyer’s inspection report?

The seller may choose to attach a copy of the first buyer’s inspection report to the RECR as part of the seller’s amendment to the RECR. The new buyer should be advised that the first buyer’s inspection report is given to provide information only. The statutes regulating home inspectors provide that the home inspector will not be liable to subsequent buyers for any errors or omissions contained in the first buyer’s inspection report. The new buyer may be advised to have their own home inspection performed if the buyer wants the home inspector to be liable for any oversights.

The listing agent is not obligated to provide a copy of the previous buyer’s inspection report to the next buyer. The listing agent may provide a copy of the first buyer’s inspection report if it has been attached to the RECR by the seller. If the seller has not attached the first buyer’s inspection report to the RECR, then to guard against any possible confidentiality concerns, the agent would not unilaterally provide a second buyer with the first buyer’s inspection report without consent of all parties to the first transaction.

Is a buyer required to provide a copy of the buyer’s inspection report to the seller? What if the buyer is not objecting to defects?

According to the terms of the WB offers to purchase, the buyer agrees to promptly provide copies of all inspection and testing reports to the seller. This is in the inspections and testing section of the WB offers to purchase. The agreement to promptly provide copies of all inspection and testing reports to the seller is not qualified on whether the buyer is objecting to results. Even if the results are great, the buyer still must provide them.

An appraisal report is handled differently than inspection and testing reports. A buyer only has to provide a copy of the appraisal report to the seller if the buyer’s offer included an appraisal contingency and the buyer is objecting to the amount. If the buyer is not objecting to the amount in the appraisal report, the buyer does not need to provide that to the seller.

The seller does not want to see the inspection report. The amended offer removed “Buyer agrees to promptly provide copies of all inspection and testing reports to Seller” from the inspections and testing section. What’s next?

If the language obligating the buyer to deliver the inspection and testing reports was deleted from the offer to purchase, the buyer would not have to deliver it. Relieving the buyer of that obligation, though, does not change an agent’s duty to disclose material adverse facts to all parties in writing in a timely manner, so the seller is going to find out about the “bad stuff” that was in the report even if they do not see it. 

The buyer delivered the inspection report anyway, and the listing agent said they will not show it to the seller per seller instruction. Can the listing agent do that? 

A listing agent is obligated to follow the lawful instructions of the client that are within the scope of the agency agreement. If a seller instructed the listing agent not to show the inspection report to the seller, the listing agent does not have to show the inspection report to the seller. The listing agent still must disclose material adverse facts and information suggesting material adverse facts, so whether the listing agent learns of the information in the inspection report from the buyer’s agent’s disclosure or from seeing the report itself, the listing agent has 
a legal obligation to disclose that information to the seller. 

What if the seller or the listing agent learns new information about the property and there is an accepted offer on property? Does the seller have to amend the RECR and give it to the current buyer? 

If a seller or a listing agent learns new information about a property, the correct process depends on the nature of the new information. If the new information is damage to the property from a tree falling on the garage or a pipe springing a new leak, the seller does not amend the RECR, but rather the parties look to the property damage between acceptance and closing section of the offer to figure out what to do. Under that provision, if the damage is equal to or less than 5% of the purchase price, the seller is to notify the buyer and restore the property to materially the same condition as it was on the date the offer was made. The seller must provide the buyer with copies of any required permits and lien waivers for lienable repairs no later than closing. If the damage is more than 5% of the purchase price, the seller still must notify the buyer, but the buyer has the choice to terminate the offer or continue with the transaction. If the buyer continues with the transaction, the buyer is entitled to the seller’s insurance proceeds and a credit for the deductible.

If the new information is not damage to the property, the seller still does not have to amend the RECR. Maybe the seller’s neighbor has a survey completed, and both the seller and the neighbor learn that the neighbor’s fence partially encroaches on the seller’s property; or perhaps the seller learns that the municipality is proposing a 300% increase to the fees for garbage and recycling collection. In neither case would the seller amend the RECR and provide it to the existing buyer. The listing agent’s duties remain the same, though, and the listing agent would have to decide whether the newly discovered encroachment or the proposed increase in the fees for garbage and recycling collection is a material adverse fact or information that suggests a material adverse fact that would need to be disclosed to all parties in writing in a timely manner.

What happens if a seller with an accepted offer amends the RECR and gives it to the existing buyer?

The seller just gave the buyer a two-business-day right to rescind the buyer’s offer, and the buyer is entitled to a return of their earnest money. 

Forms access

The WRA forms in this article are available for WRA members in Transactions (zipForm Edition) and the WRA Forms Library. Both products are included with WRA membership.