When negotiating to buy a home, people can get overwhelmed by the number of things they have to cover and pay attention to. One of the things that shouldn’t fall to the wayside is the home inspection contingency.
What is a home inspection contingency and why you need one? A home inspection contingency gives the buyer the right to hire a professional home inspector to examine the house within a designated time. This contingency period (typically 7-10 days) allows buyers to do their due diligence to gather as much information as possible to confirm their desire to purchase the home, negotiate repairs, or cancel the purchase contract.
The home inspection contingency is a fundamental part of any purchase contract, and I want to direct your attention to its benefits, as well as what you need to look out for.
A Sample Home Inspection Contingency Clause
A home inspection contingency can be defined as a clause written into a real estate purchase agreement that provides the buyer the right to have a home inspection performed by a professional home inspector within a designated time. It also provides the buyers the right to either cancel the contract or negotiate repairs if they are not satisfied with the home inspector’s findings.
An example of a home inspection contingency:
The Buyers’ offer is contingent upon a satisfactory inspection within ten (10) days. Upon receipt of the results of such inspection, the Buyers may request in writing at any time within that ten (10) day period that the Sellers make certain repairs or that the Sellers reduce the sales price to compensate for such defect(s). Such a request to repair or reduce the price does not terminate the contract and the Sellers shall have _ days from receipt of such request to agree to make such repairs or reduce the sales price. If the Sellers do not agree, the Buyers shall have _ days to waive the contingency and accept the property “as-is” or to declare the contract null and void. Earnest money and accumulated interest will be returned to Buyer within 48 hours upon written notification to Seller or his/her agent that contract has been terminated by Buyer.
Note: This is a generalized sample of a home inspection contingency clause. This may not be applicable in all circumstances. You should consult with your licensed real estate broker or a real estate attorney before making any home purchase offer.
What is a Contingent Purchase Offer?
In the real estate context, a contingency is a set of specific conditions that need to be met for the purchase of the home. If these conditions are not met the contract cannot be considered legally binding.
From this point onwards both parties are facing two options, either renegotiating or canceling the contract.
The contingency will become a part of the binding contract only if both parties (both the buyer and the seller) agree and sign to the terms and conditions of the agreement.
There can be different types of contingencies – one of which is the home inspection contingency. Other real estate contingencies include:
- Appraisal contingency
- Financing contingency
- Home Sale contingency
A contingency can be created for almost anything that’s negotiated. Thus it is crucial to understand its purpose when signing a contract. A proper contingency clause will protect the buyer and give them the necessary freedom to cancel the contract if they choose to.
The contract you sign when buying a house is legally binding. It will define the obligations and what both sides are expected to do. Contingency clauses can be a part of any real estate contract.
How the Whole Process Works
- The buyer makes an offer to the seller.
- The buyer includes a home inspection contingency (or any other contingencies they would like to have) as part of the purchasing contract.
- The seller accepts and signs the contract, and at this point, the earnest money is being paid by the buyer who goes in an escrow.
- In the agreed time, the buyer arranges for a home inspection to take place.
- The home inspector carries out an inspection of the home and creates a written inspection report that is given to the buyer.
- The buyer makes a decision based on the information in the inspection report. They can either accept the home condition as-is, request repairs, or cancel the deal and get back their earnest money.
What Will Happen During a Home Inspection
A home inspector will provide you with a written report of the condition of the building.
The standard home inspection covers a lot of the most essential parts, elements, and components of the home. Anything accessible, both physically and visually, is going to be inspected. It is important to keep in mind that this is not the be-all and end-all of the inspections you might need to carry out. Additional inspections, such as a termite inspection, will likely also be required as a lending requirement.
If the home inspector notices a particular point of concern, such as low water pressure, they might advise you on contacting a certified plumber who can better assess the reasons for the low water pressure and take the necessary measures to correct the problem.
Other areas that the standard home inspection doesn’t cover are:
- Lead-based paint
- Pest and animal activity
- Sewer and septic systems
- Radon and methane gas, and more
Keeping this in mind, the buyer has to personally schedule an inspection with a qualified expert about each of these if they choose to. Again this has to be before the contingency expiration period. In some cases, the contingency period can be extended provided both parties are in agreement for the extension.
How Will a Home Inspection Contingency Protect You
The home inspection contingency (i.e., due diligence contingency) is significant for any home buyer. If the buyer is not happy with the inspection results, they can walk away from the deal.
The most crucial part is that this also allows the buyer to get back the earnest money they have paid initially. However, this needs to be clearly written in the contract that both parties have previously signed. It also gives them the power to negotiate repairs if the home inspection report has found some concerning issues with the property.
Upon receiving the report from the home inspector, the buyer can do the following:
- Approve the inspection and move the contract to the next step.
- Disapprove the inspection, terminate the deal, and receive a full refund.
- Request a time extension for further inspections.
- Request repairs or concessions. At which point, the seller will review the request and issue an approval to complete repairs or make a counteroffer. Based on the response, buyers can accept the counteroffer, continue negotiating, or walk away.
How Do Repair Negotiations Work After a Home Inspection
The issues and hazards that might arise after a home inspection frequently will lead to renewing the negotiations. Depending on the type of repairs, the cost can be from a few hundred dollars up to several thousands of dollars.
Here are two of the options we are facing in that kind of situation:
- Requesting repairs be made – A licensed contractor should repair any repairs noted in the home inspection. Many sellers don’t want to do this because it means additional time and money dealing with contractors when all they want to do is sell and move on.
- Requesting a repair credit – Imagine being in the seller’s shoes and discovering you have to spend even more time scheduling and carrying out new repairs. A repair credit is an agreed upon amount of money that the seller provides the buyer to have the repairs done themselves.
What some buyers can do is request a cash credit that will cover the costs for repairs.
That way both the seller and the buyer can make a compromise and feel happier with the outcome – the seller is not going to deal with any repairs, and the buyer gets a discount from the price of the house.
A Cost-Of-Repair Contingency
In addition to the inspection contingency usually, a cost-of-repair contingency can be added. It establishes a specific budget range for the repairs that might need to be done. Typically, such a contingency is based on a percentage of the total sales price of the home.
If the outcome of the inspection comes to the conclusion that the cost for repairs is going to be more than the limit the buyer has the right to back out of the contract.
Home Inspection Contingency Expiration Date
Another essential part of the whole process that you need to be absolutely aware of is the home inspection contingency expiration date.
Although an inspection contingency can protect the buyer, it is essential to read and understand the deadlines and the specific dates mentioned in the contract.
If more time is needed to carry out the necessary inspections or there are any scheduling conflicts, by mutual agreement, the expiration date can be extended. This is common when utilities have to be turned on, which cut into the contingency period.
It is essential to keep track of the dates as the buyer can end up buying a house that has not been correctly inspected or repaired.
What is the main reason to make your purchase offer contingent on a home inspection? The main reason you should have a home inspection contingency is to verify the information on the seller’s disclosure and verify that there are no major issues you were not aware of prior to making your purchase offer.
Should you waive a home inspection? Having a home inspection as part of a home purchase just makes sense. In the event repairs are needed, you’ll need a home inspection report to request any desired repairs. Without the inspection report, your purchase offer is accepting the house “as is” including all underlying problems it may have.
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