(CORE) Current Issues in Washington Residential Real Estate 2024-2025

Evidence of Funds Addendum for Real Estate Transactions

One of the crucial elements a real estate broker must comprehend is the Evidence of Funds Addendum, which provides the seller with confidence in the buyer's financial capacity to complete the transaction. This competency is particularly significant in understanding and correctly interpreting contingent and non-contingent funds within an offer. This section will focus on enhancing a broker's ability to navigate and utilize Form 22EF, which has become increasingly emphasized in our state.

The Evidence of Funds Addendum (Form 22EF) plays a pivotal role in today's real estate market, where proof of a buyer's financial readiness can be the deciding factor in closing a deal. It is pertinent for real estate brokers to ensure that all parties involved are conversant with the specifics and implications of disclosing the source of funds.

When a buyer makes an offer on a property, it is standard to include a provision in which the buyer represents that the purchase price, including Earnest Money, will be paid in cash at closing unless otherwise specified in the agreement. Here, the buyer asserts that they possess adequate funds to finalize the sale and are not relying on contingent sources like financing, property sales, gifts, retirement funds, or future earnings unless expressly acknowledged in the agreement. This also includes measures of caution against wire fraud and mandates verification of any wire instructions.

The Evidence of Funds Addendum allows buyers to demonstrate the legitimacy of their non-contingent fund's money that they currently hold and is not subject to any contingencies, such as the need to obtain a loan, sell another piece of property, or receive a gift.

Buyers must furnish evidence, typically in the form of documentation from a U.S.-based financial institution, confirming the availability of sufficient funds. This proof should be supplied according to timelines stipulated in the purchase agreement, ordinarily within a few days of mutual acceptance for non-contingent funds and by a deadline before closing for contingent funds.

The seller is entitled to request additional information about these funds. Any failure on the buyer's part to present the evidence within the predetermined timeframe could lead to termination of the agreement by the seller, with any Earnest Money being refunded to the buyer.

It is essential to note that the buyer, when disclosing reliance on contingent funds, must detail the nature of these funds, be they loans, sale proceeds of assets they own, gifts, or others. This transparency affords the seller a comprehensive understanding of the buyer's financial position and the reliability of the transaction's completion.

If the Contingent Funds are unavailable by the closing date, rendering the buyer unable to complete the purchase, the buyer will default. The seller then has recourse to the remedies in the purchase and sale agreement.

In light of these points, real estate brokers must advise their clients to utilize the Evidence of Funds Addendum whenever there is any reliance on funds that could be considered contingent. Such due diligence not only promotes the likelihood of a successful transaction but also safeguards the interests of all parties involved.

Practice Tip: Ensure buyers are adequately prepared to disclose their funding sources and understand the consequences of non-disclosure. For sellers, verifying a buyer's financial capacity via the Evidence of Funds Addendum is key to securing a smooth transaction. As such, real estate brokers should be well-versed in requesting and interpreting these disclosures.

The Inspection Addendum: Enabling Thorough Due Diligence for the Buyer

As an experienced broker, your expertise in navigating through the inspection period is crucial for safeguarding your client's interests. Our focus today is on a significant component of this addendum:

Buyer's Right to Request Additional Inspection

The Inspection Addendum is not just a formality but an empowerment tool for buyers. The Inspection Addendum allows for a more detailed examination of the property should crucial issues arise during the initial round of inspections. Here's what you need to grasp and convey to your clients:

According to the Inspection Addendum (Form 35, Rev. 7/23), under "5. ADDITIONAL TIME FOR INSPECTIONS," the buyer may invoke their right to request additional inspections before finalizing their inspection response. This allowance is predicated on recommendations from prior inspections, and the request must occur on or before the end of the Initial Inspection Period. The buyer, upon such a request, is entitled to an extension typically five days to engage specialists for further investigation into specific concerns about the property.

This right to extended investigation is crucial when potential issues are flagged, whether structural, mechanical, zoning code compliance, hazardous materials, or any other concerns that were not sufficiently addressed during the general home inspection. It ensures that your buyer can proceed with confidence, capable of making an informed decision.

Remember, the ability to request additional inspections is subject to timely notification to the seller and may also include providing copies of the inspector's recommendations if the seller has requested such within the stipulated inspection period. The delicate dance of negotiation and communication here is critical; the buyer must be proactive and decisive, while you, as their broker, must ensure all procedural requirements are meticulously followed to protect their right to further scrutiny.

Pre-Inspection Agreement

When entering a pre-inspection agreement, it is essential to grasp its function within the real estate transaction process. This agreement allows a potential buyer to inspect the property before formally entering into a purchase and sale agreement. It sets the stage for a clear understanding of the property's condition and can influence the negotiation process significantly. Washington State's Form 35P is our guide to explain the importance and the responsibilities it lays out for buyers and sellers.

Key Elements of the Pre-Inspection Agreement (Form 35P)

• Pre-Contract Inspection: The agreement permits the buyer to schedule a thorough inspection of the property, including assessments of the structural integrity, mechanical equipment, building and zoning compliance, hazardous materials, and even pest or soil stability examinations. The inspectors performing these evaluations must meet the licensing requirements of Chapter 18.280 RCW or be exempt from such licensing.

• Buyer's Obligations: The buyer assumes full responsibility for organizing, executing, and bearing the costs of all inspections. Furthermore, the buyer must refrain from altering the property or its improvements without the seller's explicit consent. After the inspection, the property is to be restored to its initial state, with the buyer being liable for any damages incurred during the inspection process. The agreement also states that inspection reports remain confidential unless the seller requests access.

• Sewer Inspection: As part of the agreement, buyers may (or may not) opt to conduct a sewer system examination, potentially including a video assessment. This may entail temporary removal of fixtures, such as toilets, to access the sewer line.

• Oil Storage Tanks: Where the presence of oil storage tanks is concerned, the inspection is limited to identifying their presence or absence unless both parties consent to a broader scope.

• No Further Obligation: It is essential to understand that executing this agreement does not compel either party to proceed with a subsequent purchase and sale agreement; it solely facilitates the option for a preliminary inspection.

• Attorney's Fees: Should disputes arise concerning the agreement that results in litigation, the prevailing party can seek compensation for attorneys' fees and associated expenses.

By signing the Pre-Inspection Agreement, the buyer and the seller acknowledge their roles and responsibilities as outlined above. Such knowledge is crucial for licensed real estate brokers to guide their clients through preliminary property evaluations effectively. Remember, while the agreement provides a framework for the inspection, it is not a commitment to purchase or sell.

Overview of the Inspection Addendum

The Inspection Addendum is an integral part of the Purchase and Sale Agreement and sets forth the following provisions:

1. Inspection Contingency: This clause establishes the buyer's right to inspect the property and its improvements according to their subjective satisfaction. It includes but is not limited to evaluating the structural integrity, mechanical condition, compliance with building and zoning codes, and the presence of hazardous materials. Buyers can engage specialists for a thorough investigation of the property.

2. Buyer's Obligations: The buyer is responsible for ordering and paying for all inspections, selecting inspectors, and ensuring that the property is restored to its condition before inspection. Importantly, no alterations are to be made without the seller's permission.

3. Buyer's Notice: Here, the timelines within which the buyer must act are outlined. The buyer has a specific time frame-10 days if not otherwise filled in-to either approve or disapprove the inspection results, potentially request additional inspections, or suggest repairs or modifications to the property.

4. Inspection Report: The inspection report or relevant portions shall only be provided to the seller upon the seller's written request.

5. Additional Time for Inspections: If the initial inspector recommends further specialized evaluations, the buyer may request additional inspections, and if the seller has requested, provide a copy of the inspector's recommendation. The Initial Inspection Period can be extended to allow for these additional inspections.

The Inspection Addendum provides a structured framework for the inspection process that protects the buyer's interests and permits flexibility to address concerns arising from initial inspections.

Seller Request within the Inspection Addendum

Following our examination of other aspects of the Inspection Addendum, it's essential to address an important but often overlooked feature: the Seller Request. As seasoned brokers, you understand that the inspection process is not just about uncovering defects-it is also an interplay of communication and negotiation between the buyer and the seller. The Seller Request, outlined in the Inspection Addendum (Form 35, Rev. 7/23), is a subtle yet powerful tool for sellers within this dynamic.

Seller's Ability to Request Information

Under the subsection titled "Seller Request" within the Inspection Addendum, the seller is given certain rights to request information about the conducted inspections. Notably, while it may seem counterintuitive, these requests can significantly influence the negotiation process. Here are the available options as provided in the addendum:

1. Seller's General Request for the Inspection Report: The seller can ask the buyer to provide the inspection report.

2. Request Relating to Specific Repairs or Modifications: If the buyer proposes repairs or modifications to the property or the agreement, the seller can request only the portions of the inspection report related to these proposed changes.

3. Request Upon Notice of Additional Inspections: When a buyer is notified of additional inspections as recommended by the initial inspector, the seller can request a copy of the inspector's recommendation for these further evaluations.