Have you ever made a purchase you were really, really excited about, only to find out a few days later it wasn’t exactly what you were expecting?
Maybe it was a new appliance that started acting up, a new car that’s engine gave you grief, or a pricey sweater that unraveled after the first wash.
Luckily, these items often come with a warranty or return policy, so you (and your wallet) aren’t out the money for the faultiness of the item. When you buy a home, unfortunately, there’s no return policy. That’s why it’s so important to perform due diligence before you take the plunge on a new house.
Enter: The home inspection contingency.
It’s like you get to put a house “on hold” (in other words, take it off the market), and then bring in an expert (or multiple) for a second opinion before finalizing the purchase.
With home inspection contingencies, a buyer can cancel a purchase agreement with their earnest money intact… as long as they follow the rules.
We’ll cover exactly what those rules are, along with when and why you may, or may not, want a home inspection contingency clause.
What is a home inspection?
Home inspections tell you the good, bad, and ugly details you need to know about a house. Professional home inspectors examine and determine the condition of the house from top to bottom, and then provide a detailed report of their findings and recommendations.
Standard home inspections include an analysis of major parts and systems of the house, such as the HVAC, plumbing and electrical, roof, and structural condition, along with doors, windows, walls, and ceilings.
Inspections are an important part of purchasing a home as they provide prospective buyers with a comprehensive overview of any issues with a house. They can uncover costly repairs, risks, or other red flags, and buyers can use findings from inspection reports to determine if the repairs are worth it (and within budget) — or, in the case of a home inspection contingency clause, use the needed repairs as a negotiating chip with the seller.
What is a home inspection contingency clause?
A home inspection contingency clause is a stipulation in the purchase agreement that says the buyer can inspect the home, top to bottom, and then decide whether to move forward with the purchase.
This clause can be added to a real estate sale agreement contract between the buyer and seller, and it grants buyers the right to a home inspection (within a designated time frame) and then the opportunity to negotiate price, repairs, or back out of the contract entirely.
“In Minnesota, the inspection contingency is embedded in the actual purchase agreement document,” explains Raghuveer, stating that it’s usually a four- or five-paragraph area within the purchase agreement.
“It outlines the number of days that the buyer will have to inspect the home, deliberate on the home, and negotiate a settlement on any issues they see with the property.”
Let’s say you receive the home inspection report and there are one too many troublesome issues for your comfort. You’re ready to pull the plug on the deal and continue your home search.
Could it be as simple as that? What happens to the earnest money you put down? And when is it too late to pull out of the contract?
Let’s take a further look into these important considerations.
Good news! If the inspection revealed issues and you’d like to back out of the contract, as long as you completed the inspection within the deadline, you’ll get your earnest money back. Just make sure you have this condition clearly laid out in the contract ahead of time.
If a buyer proposes repairs to the seller as a negotiating point, but the buyer and seller cannot come to an agreement, as long as the reason for canceling the deal is included in the purchase contract, the buyer can withdraw from the contract and receive their earnest money deposit back.
Home inspection contingency deadlines
A contingency deadline is an agreed-upon timeframe between the buyer and seller, starting from the contract date, in which the buyer can still back out of the purchase and keep their deposit. This period can range anywhere between two weeks and two months, and during this time, the homebuyer is in charge of scheduling and paying for inspections to examine the health of the home.
It’s important to note these dates for several reasons. Not only does this keep you from losing out on your deposit by something as unfortunate as missing a deadline, but the date also outlines the timeframe for when you can submit repair requests or propose negotiations on price to the seller based on findings from the home inspection.
Get it in writing
Local state and area requirements for backing out of a contract due to an inspection contingency can vary. Some locations may request you send a copy of the official inspection report, a dated official written statement explaining your reasoning (the contingency) for canceling the contract, along with proof from the inspector that there is an issue.
For guidance, talk with your agent about what to do. Your agent can help walk you through creating a cancellation document and crossing any other required t’s and dotting all the necessary i’s.
Buyers: what to include in a home inspection contingency
To protect yourself and your money, there are a few things as a buyer you’ll want to include in your home inspection contingency clause. The first? A clear-cut exit plan.
An easy (and quick) way out
Having a plan in writing to get out of a contract — in the event that the home inspection report turns up some big-ticket issues (foundation troubles or a roof far past its prime, for example) — can protect you from becoming a financial scapegoat for those issues.
A time frame you can work with
Give yourself some wiggle room, both to track down a trustworthy inspector, get an initial walk-through completed, and schedule any follow-up inspections if need be.
Chase Williamson, owner and inspector for West River Inspections, a five-star rated home inspection company serving the black hills region out of Spearfish, South Dakota, says most of the time clients he works with need an inspection completed within 10 business days.
“On average, the process takes about five days — just days in general — for me to get the phone call, get the inspection in, and go out and do the process,” explains Williamson.
Following the inspection, Williamson says it’s typically a three-day turnaround to get the client the full inspection report.
Choose your wording carefully
In your contingency clause, clearly state that you want full access to inspect every square inch of the house. That means all the nooks, crannies, basements, and attics.
Though these areas may be lesser-traveled, they can be just the place mildew, mold, or moisture damage are hiding.
“Attic spaces. Absolutely. That’s where I find most of the issues,” says Williamson.
Many times, a home inspection contingency allows the buyer to hire further experts of their choosing beyond the initial home inspector. These experts may be recommended by the inspector based on initial findings, and they can perform more specialized home inspections around common problem areas, such as the foundation, roof, or chimney, or check for termites or mold.
Consider including a radon test
Another thing Williamson suggests is that clients consider having a radon test conducted.
Williamson explains that radon is an invisible gas caused by the breakdown of rocks and soil, and though we can’t see or smell it, it’s around us all the time. But the true danger in this gas lies in how concentrated it is.
“It can be equivalent to smoking cigarettes,” explains Williamson.
Highly concentrated levels of radon (which are commonly found in basements and crawl spaces) is dangerous, with long-term exposure being linked to lung cancer. Williamson says that radon is something lenders are more aware of now, and that some banks are starting to require radon tests on homes while many contractors are using radon mitigation systems.
If a radon test does show high levels in a house, buyers can use this as a negotiation point and request a seller have a mitigation system installed to bring the radon levels below 4 pCi/L, which is considered safe.
Should you waive an inspection contingency clause?
To make an offer more competitive on a house, a buyer can choose to waive a home inspection contingency clause.
“Out of necessity, inspections have become waived by buyers just because of the competitive nature of the marketplace. So, if you went in with an inspection, you could almost lose the transaction,” says Raghuveer.
Raghuveer believes there are three categories that houses fall into.
The first category is houses that definitely need an inspection. Often, from Raghuveer’s experience, these are houses he feels may have hidden issues and it would be beneficial to have a contractor or inspector’s expertise.
These could include homes that have experienced extreme weather in recent years, like flooding or a severe hail storm that’s notoriously damaged houses in the area. Older homes, where the electrical, plumbing or other vital systems may now be outdated, should probably also be inspected.
The second category includes homes that a buyer is determined to get — even if they know it probably needs repairs. Having an inspection done is a way to inform the buyer how much those repairs are going to cost rather than inform the buyer whether they want the house at all.
In that situation, your agent or a licensed contractor can walk you through the estimated cost of repairs, and help you understand roughly how much you’ll be on the hook for after closing.
That way, explains Raghuveer, the buyer can use the inspection for informational purposes to decide if the estimated repair costs in a worst-case scenario are reasonable. After all, a few hundred dollars for minor cosmetic repairs are a whole different ball game than $25,000 for a new roof.
The third category is when the property is so “clean” that the buyer feels comfortable moving forward without an inspection. This could be a home that’s built by a reputable builder, is less than a year old, and is under warranty.
Why you might waive an inspection contingency clause
Waving a contingency can give a buyer a more favorable edge with a seller who has multiple bids on the table. But keep in mind this strategy comes with its own set of drawbacks.
For one, in doing so, the full weight and responsibilities of any needed repairs fall on the buyer’s shoulders. If that buyer is already planning to gut the place and they’ve got a stack of cash to spend, this may not be a big deal. But if not, those dollar signs can start adding up quickly — especially when it’s not just one or two fixes but several expensive home repairs.
Because of this, even if choosing to waive a contingency, it’s a good precautionary measure to have a home inspection completed before officially signing a sales agreement. This will at least give you a ballpark estimate of future expenses.
Also, waiving a home inspection contingency clause doesn’t mean you can’t inspect the house at all; it just means you can’t leverage any findings from the inspection report for negotiating, and you likely can’t walk away from the deal with your earnest money if the report finds something you don’t like.
If choosing to waive a contingency clause, keep in mind that without its protection, backing out of a sale may not be so easy. There’s a chance you’ll be kissing your earnest money goodbye, and if things escalate, potentially facing a lawsuit from the seller for breach of contract.
Advice from a home inspector
From Williamson’s experience, there tends to be one common culprit causing property damage.
“Worry about water,” Williamson states. “You’re looking at a home, and you’re making a long-term investment, so you have to look at it in the context of what’s going to affect the home the most, and that’s going to be water over a long period of time.”
With a home’s foundation, Williamson explains that the grade should always be sloping away, helping to mitigate water away from the house. A home’s attic space can be another problem area due to moisture. For example, if there’s not a lot of ventilation in a home’s attic, then there’s a pretty good chance you’re going to have water issues up there — like mold.
With older homes, Williamson says he keeps a particularly close eye on the home’s foundation, especially if the house has high amounts of rough water penetrating it and a poor water mitigation system. On all houses, whether new or old, he checks out key parts of the exterior of the house that come directly in contact with water.
“Gutters, roof, all those things are really important if you want a long-term investment and you don’t want the house to degrade at a quicker rate.”
Williamson also advises buyers to always “tread lightly” when looking at homes where general upkeep is…well… lacking. Dirty windows, chipping paint, or loose shingles, for example, could all be red flags.
From Williamson’s experience, if the smaller details of the house are falling through the cracks, it’s likely that the bigger (and more expensive) ones are, too.
How to stay competitive
Buying a home is an exciting time, but whether you’re a first-time buyer or a seasoned investor, there are steps along the way that can throw you for a loop.
For example, Raghuveer explains a first-time homebuyer may look in a market where an agent knows they’ll be going up against four or five offers.
“You have to have that whole system figured out before you even step into the home because then you can get an inspector in there while they’re doing the showing to explain how costs are going to work out,” says Raghuveer.
This is where having expert knowledge and being privy to insider tips — especially in a competitive market — can be an invaluable tool. A top agent can lend you the upper hand you need to be competitive to land the home of your dreams.
For Raghuveer, he likes to first thoroughly discuss with his clients any potential red flags and the value of the home — not just market price, but also the long-term market value of the home. Afterward, if the client’s heart is still in the purchase, then Raghuveer’s philosophy for landing his client their dream home is a simple one.
“If we’re going to write an offer on a property, we’re going to win. Period.”
Header Image Source: (Point3D Commercial Imaging Ltd. / Unsplash)