What Is an Inspection Contingency?
An inspection contingency is a clause in the purchase contract that states the buyer’s offer is contingent on the outcome of a home inspection. The clause will also state how long the buyer has to conduct an inspection and respond to any issues. Inspection contingencies are also known as due diligence contingencies. They give the buyer time to verify the property’s true condition and gather enough information to feel confident in moving forward with the sale.
Can You Negotiate an Inspection Contingency
Yes, you can negotiate an inspection contingency. Even though you find inspection contingencies in most contracts, the specifics need to be negotiated and can also vary depending on the city and state. This clause protects the buyer from unknowingly purchasing a home with apparent defects or issues that would impact the market value. It also gives the buyer a chance to renegotiate the price or request the seller make repairs or changes before the closing. When you sign a purchase contract, ensure it has an inspection contingency if you plan on conducting an inspection.
Inspection Contingency Explained
An inspection contingency allows the buyer to renegotiate or back out of a sale if the inspection uncovers something alarming. Without this clause, you may be obligated to move forward with your offer even if the inspection revealed something serious that impacts the value and livability of the home.
A seller can’t just let anyone schedule an inspection of their home because it would be too time-consuming and invasive. They will only permit you to schedule an inspection once you’ve submitted an offer and signed a contract committing you to the sale. So, the inspection contingency gives you the right to modify or even void the contract if the inspection reveals something unfortunate.
Inspection Contingency Example
Say you put in an offer on a home for $250,000 after pulling comps with your broker. You submit your offer, and the seller accepts. You then sign a purchase agreement with an inspection contingency and put down an earnest money deposit. But, during the inspection, it’s revealed that there’s severe damage to the roof that will cost $40,000 to repair. That discovery would likely give you second thoughts about moving forward with the sale. However, since the contract contained an inspection contingency, you’d be able to make adjustments. At this point, you could drop your price to account for the cost of repairing the roof. You could also request that the seller make the repairs before the closing (if it’s feasible to do so). If you and the seller cannot agree, the inspection contingency allows you to back out of the sale and still get your deposit back.
Waiving vs. Using an Inspection Contingency
Times to Use an Inspection Contingency
Most homebuyers purchasing a primary residence will want an inspection contingency to protect themselves from making a bad investment. Investors who wish to protect their bottom line as much as possible are also wise to use an inspection contingency to verify the property’s condition before buying. An inspection contingency is a smart move for anyone who may be negatively impacted by unforeseen structural issues or other problems with a property they’re looking to purchase.
Times to Waive an Inspection Contingency
Even though the majority of home purchasers should use an inspection contingency, there are times when you may want to waive your right to an inspection. If you want to move quickly and aren’t concerned as much about the condition because you’re planning on renovating anyway, you may wish to waive the inspection contingency. Or, if you’re in a hot market and have reason to believe the home is in sound condition, you may waive the right to an inspection to speed up the closing and beat out other offers. But understand that in doing so, you’re agreeing to purchase the home “as-is” and will have little recourse if problems arise later on.
Other Types of Contingency Clauses
1. Financing Contingency
A financing contingency states that the offer is also contingent on the buyer being approved for a loan. The lender can’t complete the underwriting process until the buyer has submitted an offer. So, a financing contingency allows the buyer to withdraw from a sale if their loan is denied.
2. Home Sale Contingency
A home sale contingency allows the buyer to rescind their offer if a previous home doesn’t sell within a reasonable amount of time. You may be looking to buy a home while you’re listing your old home if it’s a primary residence. So, to avoid being on the hook for paying two mortgages simultaneously, a home sale contingency allows you to back if you’re having issues finding a buyer for your first residence.
3. Title Contingency
A title contingency allows you to back out of the sale if any issues with the title are discovered. As the new buyer, you may be liable for any judgments or problems that were caused by previous owners. For instance, if the previous owner owed back taxes and there’s a lien on the property, you may be expected to assume the debt if you buy the home.
4. Appraisal Contingency
An appraisal contingency allows you to back out of the sale if the value of the home certified by an appraiser is significantly lower than what you expected. Most banks will require an appraisal and will only lend up to a certain percentage of the home’s true value. So, if your offer was significantly higher than the true value, an appraisal contingency allows you to back out of the sale rather than pay the difference out of pocket.
Inspection Contingency Bottom Line
An inspection contingency protects the buyer from purchasing a home with unforeseen problems that will impact the value. While there are scenarios where waiving an inspection contingency may be beneficial, most home buyers are wise to ensure this clause is in the contract. Otherwise, you’ll be committed to the purchase no matter what future problems arise.