Question: What are the different ways of structuring a Home Inspection Contingency and how do they affect the odds of my offer being accepted?
Last Week’s $1,000 Donation Poll
Before I jump into today’s column, I want to announce that based on last week’s vote, our team donated $1,000 to the Fisher House Foundation on behalf of the ARLnow community in honor of Memorial Day. Fisher House Foundation builds comfort homes where military & veteran families can stay free of charge, while a loved one is in the hospital. Thank you to everybody who voted and commented with feedback about the various charities.
Home Inspection Contingency Overview
Not only is this market pushing Buyers to offer well over asking price, it’s also pushing them to take on a lot of risk by reducing or eliminating the protections offered by standard contingencies: Inspection, Financing, and Appraisal Contingencies are the “Big Three.”
Of the “Big Three” contingencies, the Home Inspection Contingency represents the most risk to a Seller because it gives the buyer a nearly unilateral option of voiding and/or the ability to request Seller repairs or Seller credits based on the findings of the inspection. Thus, Buyers who reduce or eliminate the risk of a Home Inspection Contingency to a Seller are viewed much more favorably than Buyers who do not.
A home inspection is when a Buyer hires a licensed Home Inspector to provide a report on the condition of a home. They examine and test things like appliances, the roof, water drainage, and the electrical system to help Buyers understand what they’re buying. Depending on the size and age of a property, inspections generally cost anywhere from ~$300-$800+ before common add-ons like radon tests and chimney inspections.
If you’re buying a home, there are a few different ways of approaching the home inspection.
Home Inspection with Right to Void or Negotiate Repairs and/or Credits
This option is most favorable for Buyers and least favorable to Sellers because it allows the Buyer to void the contract (and get their Earnest Money Deposit back) if they don’t like the results of the inspection (or even if they just get cold feet) and also allows Buyers to make any requests they want for Seller repairs or Seller credits.
If a Buyer decides to void, there’s nothing the Seller can do, as long as the Notice to Void is issued within the proper window of time. Buyers can make any requests they want of the Seller for repairs and credits, but the Seller can also negotiate or reject whatever requests they want. If the Buyer and Seller are unable to reach an agreement on repairs and/or credits within a specified number of days, the Buyer has the option of accepting the Seller’s latest offer for repairs and/or credits or voiding the contract.
Most people would consider this the standard/default type of inspection, but in hot markets like we’re experiencing now, this structure is much less common.
Home Inspection with Right to Void Only
Also known as a Pass/Fail inspection. This option is less favorable to Buyers and thus, better for Sellers. In this scenario, Buyers retain their ability to void the contract after doing the home inspection, but give up the negotiation period to request repairs or credits from the Seller.
The idea behind this inspection structure is to communicate to the Seller that the Buyer just wants to ensure there are no major issues, but is willing to take on the cost/burden of smaller issues. Of course, there’s nothing stopping the Buyer and Seller from agreeing to repairs or credits within this structure, and it happens more often than you might think. This is especially true if a larger issue is discovered that is a surprise to both parties such as water penetration or a cracked foundation.
In many cases, the timeline that Buyers have to complete their inspection and make a decision to void or not is much faster than a “full” inspection, which is another benefit to the Seller. If the contract is going to be canceled, Sellers want that to happen sooner than later.
In this scenario, the Buyer does their home inspection before making an offer. It allows the Buyer to make a significantly more appealing offer to the Seller because it does not include a Home Inspection Contingency (no right to void based on the inspection), while giving the Buyer all the benefits of being informed by a complete home inspection.
The biggest downside to this approach is that Buyers are paying for a home inspection before they know whether or not their offer will be accepted so Buyers can pay hundreds of dollars and spend 2-3+ hours at an inspection for a house that they get significantly outbid on. In many cases I’ve experienced with hot homes, multiple buyers are doing pre-inspections. I recall a house in Arlington in early 2020 that had something like 20 pre-inspection done!
This approach is not always an option because there may not be enough time to schedule a pre-inspection before the Seller is reviewing offers or the Seller may not allow pre-inspections because they take up large chunks of time and get in the way of other Buyers seeing the property.
No Inspection or Info-Only Inspection
Unfortunately, the market has gotten so competitive that many Buyers are purchasing homes without doing a home inspection or doing one for informational purposes only, whereby the inspection is done after an offer is accepted without any contractual ability to void, thus risking the (likely high) Earnest Money Deposit if the results of the inspection are bad enough to warrant terminating the deal.
This is a particularly unhealthy place for the market to be because it transfers a massive amount of risk onto Buyers who choose to commit their deposit without any due diligence or makes it very difficult for Buyers who refuse to take on that type of risk to actually buy a home.
What Should We Do?
While I doubt it will ever happen, I’d like to see the state or our Realtor Associations introduce a basic/minimum inspection requirement for homes being sold to non-builders/contractors/investors (like the “accredited investor” threshold that the SEC has for certain investments).
This would mean that in a hot market where Buyers are being pressured not to do a home inspection, Sellers would pay a relatively small amount ($200-$300) for an inspection report on the core systems of the home to be conducted by a licensed Inspector, with that report available prior to offers being made or after accepting an offer, but with a short review period that includes a right to void (like the required HOA/Condo document review period).
The best advice I can give is that it’s important to understand the risk-reward balance of any decision you make in real estate, especially as it relates to structuring or removing the Home Inspection Contingency.