It is common practice when purchasing a single-family home to include a physical inspection contingency in the purchase agreement. A contingency is a condition of the purchase.
The physical inspection contingency allows the buyer to thoroughly inspect the property from one end to the other and decide whether to purchase the property based on their due diligence and those inspections.
In a normal market, the intent of this contingency was to determine whether the house met a buyer’s standards and criteria and the buyer would either approve or disapprove of the inspection, withdrawing completely from the purchase, just like you would when you were inspecting an automobile.
But over the years as homes have increased in value and become very expensive, buyers with big expectations after paying big prices have used the physical inspection contingencies in many other ways.
A 45-page detailed inspection report is often used as a bargaining chip and grounds for negotiation in many cases, to either lower the price or to get repairs and even upgrades by the seller, not originally in the seller’s plans.
Unfortunately, or fortunately as the case may be, many buyers will use a contingency to back pedal on a price that they’ve offered to pay, later sometimes second thinking the offer they made, hoping to get some pay back or a bonus from the seller.
With the market so heated as it is today, sellers and their representing agents have become very defensive about this, taking advance precaution and knowing that this is becoming a common practice and renegotiating procedure. “It’s not ethical”, said a seller I recently represented. Actually, with a contingency, a buyer can still try to renegotiate.
That certainly doesn’t mean the seller will or should agree to a price adjustment. As a precaution lately, many seller’s counter-offers state that the physical inspection shall be on a “pass or fail” basis only and cannot be used as a bargaining chip to renegotiate the price, or to negotiate repairs.
Nevertheless, it is still very important to include a physical inspection contingency so that you are going into the transaction with your eyes wide open. Certainly, if you were a buyer you would not want to buy a property and then find out later that there are significant defects that were not visually known.
The seller of course is under an obligation to reveal and disclose to you everything he knows, but there may be defects that are even unknown to the seller and so relying on a disclosure statement itself is not sufficient, if you wish to have a full understanding of the property.
After you have completed the physical inspection you still have the choice to ask for repairs or a credit in price without risking a loss of the contract. The seller can simply either negotiate or flatly and outright say “no”, at which point you can step back and make a final decision whether you wish to move forward and purchase the property “as is” or whether you want to withdraw and receive your deposit back.
You will not lose your deposit if there is a contingency, but once the “notice to perform” has been given to you, (that your contingency time period has lapsed), you will only have 72 hours at the most, and sometimes less to make a final decision of either “yes or no.”
Sellers can be very rigid in this market, especially when they have back up offers and many other options. They will not stand for renegotiating in many cases because they know that is something they don’t really need to do in this market. When the market changes one day, and it becomes more of a buyer’s market again, a buyer may be in a better position to use this renegotiation tactic as a bargaining chip.
My recommendation to a buyer is to take this inspection very seriously and know what is important and what is not. Certainly, if there are conditions that are drainage related, mold related, or hillside slippage related, these are significant problems that need to be checked out thoroughly before you move forward.
On the other hand, if this is a property you really like and there are repair issues that can easily be remedied, and the seller will not participate, I recommend seriously evaluating your position and still moving forward purchasing the property “as is”, if financially you are able. Certainly, if the house needs a new roof, that’s an expensive item but it shouldn’t stop you buying the property if you really wanted it in the first place assuming that is not a financial deal breaker. If you just can’t afford the investment of a new roof, that would be another story.
The most expensive repairs to remedy are mold and drainage problems. Moisture and water penetration can be significant and may need further investigation from mold or drainage specialists who specialize specifically. You can always ask for specific inspections for roof, plumbing, electrical, or heating to determine anticipated repair costs before moving forward.
Either way, do inspections thoroughly and understand that we are still in a seller’s market. If the property has been on the market for many months and the seller is highly motivated, you may be in a better position to negotiate a credit or repairs, but today those are not the more typical cases. Finally, my suggestion is “Don’t let your ego get in the way”. For more information email me, Ron@RonWynn.com.