How to mitigate an inspection contingency

What is an inspection contingency?

An inspection contingency is a condition of a home purchase agreement which stipulates that the buyer has the right to a home inspection. It further allows the buyer to terminate the contract and receive all deposit monies back if the results of that inspection are not satisfactory to the buyer (and/or if the buyer and seller cannot come to a mutually agreeable repair or credit solution). It is designed to protect the buyer from being forced to remain in  a transaction once discovering the property has safety issues or material defects.

Why would you waive it?

The primary reason a buyer waives a home inspection (other than if the buyer plans to completely renovate or tear it down) is to win a competitive bid situation. Sellers don’t want inspection-contingent offers because they can fall through (if the buyer terminates) or they can translate into lower net proceeds to the seller if repairs or credits are negotiated post-inspection.

Sellers strongly prefer to know that the purchase price in an offer they accept is definitely the amount they will receive at settlement. They also like knowing that the buyer can’t back out of the deal and get the deposit money refunded–the occurrence of fall -throughs on transactions with no inspections is nearly zero.

So, while it’s not in a buyer’s best interest to waive an inspection as far as knowing as much as possible about potential problems with a property, it is in the buyer’s best interest as far as increasing the chances of being the winning bidder.

How can you make it more appealing?

If a buyer is too risk-averse to waive the home inspection, there are some ways to mitigate the decreased appeal of that offer.

1. A buyer can offer to absorb the first _____ dollars of issues found by the home inspector. For example, let’s say a buyer adds a line in an offer stating that he will absorb the first $7,000 of inspection items, (excluding any problems already identified on the Seller’s Disclosure). If the inspector cites a total estimate of $9,500 for all concerns, the buyer agrees not to ask for a credit of more than $2,500.
2. Similarly, a buyer can say she will absorb any and all items under a specific dollar amount. For example, a buyer who absorbs every item up to $400 is prepared to deal with the smaller items, but doesn’t want to be stuck with any single big items (as those are usually the ones that require immediate attention and can’t be put off, like a roof or heat replacement).
3. Buyers can also add language stating that they relinquish their right to the return of deposit monies if they terminate unless the inspection shows more than a specified total amount (i.e. “If the total amount of required repairs does not exceed $10,000, buyer relinquishes right to return of deposit money if buyer terminates due to inspections.”)

CAVEAT: Be aware of two concerns with the suggestions above.

1. The first is figuring out the amount a repair will cost. Not only do inspectors tend to give ranges and not exact amounts, but sometimes they can’t give an estimate and advise the buyer to get a quote from a qualified professional. Often, having that done within the number of days in an inspection period (usually 7-10 days) is not possible, so a total dollar figure isn’t actually available.
2. Determining “required” repairs, based on the inspector’s findings is not as cut and dried as one might think. Sometimes there are gray areas, which can complicate interpretation of the options mentioned above.

If you choose to add any language like the kind I’ve discussed here, I’d recommend talking to a real estate attorney in order to ensure the verbiage is as clear as possible to both buyer and seller so there are no misunderstandings.

If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973