Inspection Contingency

TLDR: Whether you’re including this contingency or not, an inspection for information purposes is always a good idea. The contingency allows you to receive your earnest money deposit back if you can’t come to an agreement with the seller about what to repair or receive a credit for.

Even if you're blinded by love for the property, the inspector is trained to spot flaws.

Let’s begin by describing an inspection. An inspection is when a licensed inspector walks through a dwelling, scouring every inch of the property for damage or faults, and compiles it all into a comprehensive document called an inspection report. It includes detailed notes, photographs, recommended remedies or repairs, and suggestions for when to bring in additional professionals for specific cases.

Example: An Inspection Report

Inspectors use software to document and photograph all issues and send the report to the buyer. This gives the buyer the option to request repairs or a credit for each item, aggregating the issues into a handy list for the seller to review.

An inspection contingency makes the contract contingent upon an inspection–both having one conducted within a certain timeframe, and negotiating repairs or a credit for the items found. Most buyers are not experts in scrutinizing every crevice of a house and benefit from having a licensed inspector provide a detailed report of all things that are wrong with the house. These items can range from the mundane ("The top half of this outlet doesn't work") to the critical ("The foundation of the house is crumbling").

Put another way, an inspection contingency allows you to walk away from the contract for items discovered that were not immediately obvious and that the seller is not willing to repair. What do we mean by "not immediately obvious"? If, on a walkthrough of the house after you've already put under contract, you decide you cannot stand the paint color of the master bedroom, that does not qualify as a reason to terminate the contract. While you may, in fact, terminate the contract, you will likely forfeit your earnest money deposit to the seller since the paint color was apparent before you agreed to buy the house.

Tip: Expect the Inspection Report to be Lengthy

There is a running joke with handymen: they have permanent job security because of how much ongoing maintenance homes require. It's important not to be fearful of the inspection report when it inevitably returns a laundry list of items that are in need of repair or replacement. Properties of all types require perpetual TLC (more commonly known as the pesky routine maintenance), and it's extremely rare to find a house that has no issues whatsoever. Even new construction tends to have flaws! Unless you've committed to buying the property as-is, be prepared to ask for repairs to be completed by the seller or for a credit to be provided to you at closing.

Should I get an inspection if I’m buying a property as-is?

More information helps you make better decisions so it's always prudent to obtain an inspection, even if it’s just for informational purposes. You can hire an inspector before you put an offer in on the property (with the seller’s permission, of course), or you can hire an inspector after you’re under contract. The difference between having an Inspection Contingency and going without is that you won’t get your earnest money deposit back if you terminate the contract after discovering any literal or metaphorical skeletons in the closet.

When is the contingency satisfied?

There is a timeframe in which you need to have both the inspection completed and have provided a list of requested repairs or credits to the seller. The seller will then have a few days to respond, and you then negotiate with the seller until you agree on repairs and/or credits. There are three outcomes here: 

How badly you want the house and how reasonable the seller is when it comes to negotiating will affect whether you proceed with the sale.

Consider This: When is it worth forfeiting your earnest money?

Imagine your offer on a property has been accepted and you're stoked! You provide $1,000 as the earnest money deposit on your prospective new home and, due to the hot seller's market, you forewent an inspection contingency. However, you decided to get an inspection for your own awareness of the property's condition. The inspector sends you the inspection report and you discover that the foundation is cracked and will cost $50,000 to repair. 

You didn't add an inspection contingency! What now?!

In this case, it may be worth considering terminating the contract and forfeiting the earnest money, especially if you don't have $50,000 in cash to pay for the foundation shoring once you close. 

Tip

In addition to an independent inspection ordered by the buyer, many Homeowner's Associations (HOAs) will inspect properties for violations before a sale, and will require any violations either be remedied by the seller or shortly after closing by the buyer. If the seller has agreed to provide you with a credit for the repairs, be sure to actually use the cash for the intended remedies, or else you could be hit with some violation fees by the HOA for non-compliance.

Keep in mind that an HOA inspection should not be used as a substitute for an inspection that is completed by a licensed inspector; Inspection reports are much more thorough and cover both the interior and exterior of the dwelling, not just the exterior, which is the primary concern for the HOA.

At what point should I walk away?

This depends entirely on personal preference. Specifically, whether you walk away depends on how comfortable you feel with the items the inspection turned up and how willing the seller is to negotiate the repairs or provide a credit.

How long do I have to decide whether to cancel the contract?

When making an offer, you get to choose how many days you'd like to have to conduct the inspection and provide the repair requests to the seller. Typically, you'll pick somewhere between 7-14 days, and the seller will have 3 days after receiving the repair request to respond. If you and the seller can't come to an agreement within that time, you have the option to cancel the contract and receive your earnest money deposit back.

Buyer Beware: Timelines are Critical

It's your responsibility to know when the inspection deadline ends (although we will provide ample reminders!). If you decide to end the contract but fail to terminate the contract within that specified time period, you will likely lose your earnest money deposit.

When do I need more than just an inspector?

Inspectors may recommend specialists for foundation, chimney, or electrical issues, among others. They're adept at spotting issues, not necessarily proposing a remedy or estimating repair costs.