What You Need to Know About A Home Inspection Contingency
The home inspection contingency is one of the most crucial clauses in any real estate contract and if you don’t understand what it means or how it works, the opposing side could use it to their advantage in a devastating way.
In this article, we will provide an overview of the most crucial elements of a home inspection contingency including:
- What is a home inspection contingency?
- How do they work?
- How can buyers and sellers leverage this contingency to their advantage?
- Are these contingencies required and if so, when?
- Is there any real risk in waiving a home inspection contingency?
All of these burning questions and more will be answered while we examine the ins and outs of one of the most debated clauses in any real estate contract.
What is a Home Inspection Contingency?
A home inspection contingency acts like a cause in your real estate contract which outlines whether or not the buyer has the right to have the property inspected and if so, how long of a period they have to complete that inspection. This is what is commonly referred to as the “inspection period” or “contingency period”.
Buyers usually like to include an inspection contingency in their offer because it affords them the peace of mind that if something major turns up during the inspection they can either negotiate for the cost of repairs or even walk away from the deal. For buyers, obtaining a home inspection contingency is a top priority and one you should clearly communicate with your real estate agent.
What does a home inspection contingency mean for sellers? A few things; it can be used for leverage in negotiations, it could be the difference between two competing offers, it could also impact your bottom line and closing date.
For most sellers, being able to avoid having the property inspected is a dream unless they know the property is in relatively better shape compared to the competition. For this reason, many sellers happily opt to have their property inspected before putting it on the market to gain a better understanding of their position in negotiations beforehand.
Cost of Repair Contingency
What is the cost of a repair contingency in a real estate transaction? It depends on which perspective you approach the transaction from.
Another common clause in home-purchase contracts is known as a Cost of Repair Contingency. It declares the maximum financial value of necessary repairs; usually based on a percentage of the sales price such as 1% or 2%.
For example, if a buyer’s inspection report shows repairs will exceed the cost of repair contingency in the contract, they can terminate the contract and walk away.
How Does a Home Inspection Contingency work?
Understanding the process behind these contingencies can shine additional light on their role in real estate contracts and their value. So let’s examine how they actually work in a practical sense.
As a buyer, when you negotiate to keep your right to have the property inspected and your offer is accepted, you will have a pre-established period of time (per the sales contract) to hire a professional third-party inspector at your cost and then make additional requests based on the report’s findings.
After the inspection, you as the buyer will receive a detailed report outlining their findings at which point you have a few options:
- You can approve the report and move forward towards closing
- You can back out of the deal and request that your earnest money deposit be returned
- You can request to have the contract amended to extend the inspection period and buy more time to investigate further with specialists
- You can request that the sellers make repairs or concessions on the contract based on your priorities which are usually financial.
It is not uncommon for a cost-of-repair contingency to be included along with this one to further reinforce the buyer’s position.
Example of a Home Inspection Contingency
To gain a better understanding of home inspections, contingencies, and the role they each play in a real estate transaction, let’s review some examples of what you might find in a contingency.
First, you will want to hire a reputable company to perform a complete inspection of the property from top to bottom to cover all of the main systems including plumbing, electrical, ventilation, cooling, and heating, etc.
Once the inspection has been completed, the buyers will be presented with an inspection report which may require you to bring in additional specialists to further inspect:
- Mold and mildew
- Toxins like gas, asbestos, lead paint, or Radon
- Drainage (if the property is located in a flood zone)
- Air quality
Be sure to review your report carefully and ask the experts any questions that you have about what was (or wasn’t) found and presented in the report.
Why Do I Need A Home Inspection Contingency?
Typically, when discussing home inspection contingencies, the tendency is to think about buyers and how they are impacted. When in reality, the sellers of the property are just as, if not more impacted by the home inspection contingency.
One of the best investments that any soon-to-be-seller can make is to have their property inspected before listing it. This will accomplish a number of valuable things simultaneously:
- It provides the chance to make minor repairs that increase the perceived and/or appraised value of the property
- It gives the seller the advantage of advertising the property as pre-inspected which saves the buyer money and provides them reassurance
- It ethically and morally gives the sellers peace of mind that they are doing right by the buyers and not unloading a lemon that could destroy someone financially
- It can dramatically shorten the escrow period and allow for a quick closing process
For these reasons and many more, we believe that home inspection contingencies should be considered a tool for sellers even more than for buyers in a real estate transaction.
How and When to Waive A Home Inspection Contingency
In recent years, the practice of waiving the inspection contingency has become common practice as the housing market placed immense competitive pressure on buyers. However, waiving the right to an inspection period or contingency is very serious and shouldn’t be taken lightly.
Remember, if you waive your contingency, you are legally on the hook for any repairs that need to be done to the property. You need to ask yourself if the property is really worth it to you at that price and in the condition that it is in…without knowing what may lie beneath.
If you find yourself in a bidding war or competitive situation and don’t want to waive your inspection contingency as a negotiation tactic, you can try offering these bargaining chips instead which have been proven effective:
- Offer to pay the difference between the offer amount and appraisal value instead
- Offer to cover the sellers’ closing costs or some portion
- Offer a closing date based on their preferences
It is your real estate agent’s job to find out what is important to the sellers before presenting your initial offer so they can make sure it shines.
Remind your agent to reach out to the listing agent before your showing to find out what the seller’s motives and priorities are so you can present the strongest offer first.
Please summarize the legal and contractual obligations of both parties in regards to the inspection contingency. Also, what are the key takeaways from this page readers should remember?
Both buyers and sellers hold tremendous responsibility for themselves and each other when it comes to these contractual clauses. As buyers, obtaining an inspection of your property prior to purchase should never be the first thing to waive in negotiations. As a seller, one of the smartest tactical moves you can make is having your property inspected prior to listing it for sale.
It is important to remember that these clauses and contingencies were implemented for a reason with the intent of providing protection and moral and ethical safe holds for both parties. Make sure you take the time to discuss all of the potential outcomes of opting out of an inspection upfront regardless of whether you are buying or selling.