Read the fine print to understand this important condition of a purchase offer
An accepted offer isn’t the end of the story in a home sale! A home inspection contingency is a clause that buyers can include in their purchase agreements, and the final sale can hinge on this condition. The details of the contingency give buyers the chance to renegotiate or cancel a deal if certain conditions are not met. Learn how a home inspection contingency can affect the purchase or sale of your home.
With a home inspection contingency, the buyer reserves the right to hire a professional to examine the property for possible issues. Quite literally, the purchase offer is contingent, or dependent on, the results of a home inspection. That’s what an inspection contingency is: a clause that buyers can include as part of their purchase offer and agreement.
A home inspection contingency is also sometimes called a due diligence contingency or an inspection rider. To increase the appeal of their offer and remove the need to include this condition of sale, some buyers may ask to do a home inspection before signing the purchase contract. The buyer is almost always responsible for the cost of a home inspection.
Local and state laws vary on how they handle home inspection contingencies. Speak with your real estate professional and lender to clarify any questions you may have, whether as a buyer or a seller.
Even if a seller accepts an offer, the sale of the home isn’t final until all contingencies are lifted or removed. When an offer is contingent on inspection, the buyer has a specific window of time to hire a professional home inspector to take a look at the property. In some cases, lenders may not approve financing without a home inspection.
The contingency clause should outline what can happen if the buyer raises concerns identified in the home inspection report. The report may include minor or major defects, safety issues, and recommended repairs or maintenance tasks. Depending on the specific details outlined in the purchase agreement, potential buyers may then have the option to:
Get a specialized inspection to further investigate an issue
Renegotiate the deal
Withdraw their purchase offer altogether
If they cancel their offer, buyers may be able to recoup their earnest money, the deposit made to confirm the contract, if they included this in the inspection contingency clause.
The typical timeline for a home inspection contingency is around seven days, though buyers may ask for more time. During that period, potential buyers must:
Find a home inspector in their area
Book the home inspection
Review the home inspection report
Decide what to do with the results
Most home inspectors will deliver their report within 24 to 48 hours of their visit. This means that while buyers may have seven days in all, they need to schedule the home inspection in the first few days. If possible, buyers should be present for the inspection, which typically takes two to four hours.
If you are hiring a construction company to build a custom home for you, it’s unlikely they will accept a home inspection contingency as part of the contract. They don’t want you to back out after they’ve already invested time and labor into building the custom house. An independent home inspection can still reveal any possible concerns you’ll want to watch after taking possession, though.
If you are buying a brand new home that’s already built, new home building inspections are just as worthwhile an investment as inspecting an older home. As such, it is standard practice to include an inspection contingency on purchase contracts on new homes, too. A home inspector can check on the quality of work and if everything has been built to code.
It depends on how the inspection contingency is worded in the purchase agreement. Typically, a buyer can only back out of an offer if the inspection is not “satisfactory.” What “satisfactory” means may be open to interpretation. In some cases, an “unsatisfactory” inspection may be one that calls for over a certain dollar amount in repairs and upgrades.
If the timeframe for the inspection contingency ends, the buyer forfeits their right to back out of the offer because of anything in the inspection.
It is important to know what a home inspection is in this context and what it isn’t. A standard home inspection before finalizing the sale of a home only looks at aspects of the property that are easily accessible. The inspector will look at major systems, but usually will not conduct any special diagnostic tests. They will look at:
Foundation
Roof
Electrical
Plumbing
HVAC
Exterior walls
Grading
Garage
Major appliances
Bathrooms
Ceilings
Flooring
Depending on the inspector’s notes, a buyer may choose to hire a specialist to investigate potential issues further. For example, they may notice the shower doesn’t get very hot, but they won’t necessarily test to figure out why this is the case. Similarly, they may see if the flooring is level, but will not look under floors. Hiring experts to test for asbestos, radon, and lead-based paint is common as well.
With a typical seven-day contingency window, this doesn’t leave much time for buyers to get these additional inspections completed. Buyers may ask the sellers for an extension or negotiate for a different resolution.
Naturally, sellers want to see a positive outcome emerge from a buyer’s home inspection. To set up the best chances at success, some steps they can take include:
Decluttering all visible living areas
Ensuring easy access to major systems, like HVAC and electrical
Looking for damage or day on exterior elements, like the roof and outdoor walls
Checking the hot water and water pressure on all taps
Checking electrical outlets, light switches, and light fixtures
Covering up signs of old water damage that have been fixed
A great option that sellers may consider is hiring a professional for a pre-listing home inspection. They can identify possible issues to repair or correct before putting the house up on the market.
A pre-listing inspection shows the seller is motivated and has done their due diligence, which can make the property more enticing to buyers. Some buyers may waive an inspection contingency if the seller has already completed a pre-listing home inspection, streamlining the purchase process.
As part of the home inspection contingency clause, buyers and sellers have options for how they want to handle the results of a home inspection.
In an ideal world, the home inspection report comes back with zero issues or concerns, and the house is perfect in every way. A more realistic outcome is that the report only reveals minor issues, and the buyer is willing to overlook or fix these concerns themselves. In either case, the sale of the property can proceed unimpeded.
The home inspector may point out a few issues that should be addressed. The buyer can then consider a few possible options:
Overlook the concerns and proceed with the sale
Ask the seller to fix the noted problems
Request a reduction in the purchase price
Ask the seller to offer a cash credit at closing to cover the cost of repairs
Often, this can lead to some negotiation between the buyer and seller. A typical inspection contingency clause defines how long a seller has to respond to a buyer’s request and make appropriate concessions. If they are able to come to a mutually acceptable resolution, the transaction can continue. If not, the buyer may exercise their option to cancel the deal.
If the home inspector only finds minor issues that should be fixed, buyers might choose to continue with the purchase even if the seller doesn’t make any concessions. This decision may be more difficult with more significant issues that fail a home inspection.
The home may need to have its electrical system completely overhauled and upgraded, for instance. Or, there may be a major leak from the roof that has led to significant water damage and mold on the top floor. These could be deal-breakers unless the seller is willing to make a large concession to compensate the buyer.
A hot seller’s market can be very competitive, tempting buyers into waiving an inspection contingency. An offer that isn’t contingent on inspection is more enticing to sellers than a contingent offer. Sellers value that feeling of certainty. But, with such a big purchase on the line, skipping the home inspection can be a costly mistake.
Buyers may need to pay for major repairs or upgrades on their own if they discover serious problems later on. Find home inspection companies near you who give you the confidence to make a well-informed decision. The peace of mind it can provide is well worth the small investment in a home inspection, usually in the $300 to $500 range. Rest easy knowing you’ve done your due diligence as you sign on the dotted line to finalize the sale.
