Inspection Contingency
TLDR: This contingency allows buyers to receive their earnest money deposit back if you can’t come to an agreement with the buyer about what to repair or provide a credit for.
Let’s face it: unless you have a fetish for home maintenance, an inspection report will inevitably disclose issues in your house. All of those small issues that never made it off the Honey-Do-List–The dripping faucet, the outlet that doesn’t work, the cracked driveway–will likely add up to a pretty hefty list when the inspector compiles his report.
The purpose of an inspection is to make the buyer aware of current and potential issues your house has or may have, allowing them to make a more educated decision–something we encourage emphatically. Other than the financing contingency, the inspection contingency is the most common contingency a buyer will include, allowing buyers to sleep better at night knowing that if there’s a major problem, it'll be identified and they'll have an opportunity to walk away. In the same way that you don’t buy a car without first test driving it, you don’t buy a house without hiring an inspector.
Fun Fact
Some prepared sellers actually choose to hire an inspector prior to listing their house on the market so that they’re aware of what items will come up and can mitigate issues before the buyer has a chance to review an inspection report. Do we recommend this? Not necessarily. The reality of homeownership is this: regardless of whether your home has been occupied or vacant for years, there is an endless amount of maintenance required to keep up your property. Even in the nicest of properties, there will be a laundry list of things that should be repaired or replaced, and not all of them will be requested by the buyer.
Tip: Anticipate HOA- or Condo- Required Repairs
If the property is part of an HOA or Condo Association, you may remember that the association inspected your property prior to the purchase. Many Homeowner's Associations (HOAs) will inspect properties for violations before a sale, and will require they either be remedied before the sale or shortly after closing by the buyer. Be prepared to conduct repairs or to concede a credit at closing for any items identified as violations by the HOA or Condo Association.
Example: An Inspection Report
Inspectors use software to document and photograph all issues and send the report to the buyer. This gives the buyer the option to request repairs or a credit for each item, aggregating the issues into a handy list for the seller to review.
Seller Beware: Some Lenders Require Repairs
Some loans are more stringent about the state the house must be in before they’ll loan. The house is the bank’s collateral, after all. Lenders such as the VA, USDA, or FHA that allow buyers to put down very little money tend to be strict about the condition of the property since the buyer will be assuming very little risk. This means that you may be required to conduct more repairs if you’re accepting an offer from a buyer using one of those lenders. The type of lenders are important to keep in mind if you’re comparing offers from different buyers.
What if the buyer wants an information only inspection?
In a highly competitive market, you may be lucky enough to receive an offer that doesn’t include an inspection contingency. What happens if they still want to have an inspection done? Some buyers will hire an inspector to provide a report for informational purposes only, which will make the buyer aware of any issues with the house, even though they won’t be able to back out without forfeiting their earnest money deposit. With their earnest money deposit on the line, it’s unusual for a buyer to back out.
Tip: Ensure Permits are Pulled for Renovations
Buyers will sometimes ask the inspector to see if any permits have been pulled recently for the property. If you’ve made improvements to the property without pulling a permit, you may want to look into permitting those renovations. The specifics of what improvements requires a permit varies from county to county, so check with your local municipality to find out if your remodeling requires a permit.
Should I conduct repairs, provide a financial credit, do both, or neither?
In short, it depends. It depends on your financial situation (can you afford to conduct the repairs?), from whom the buyer is borrowing (will repairs be required in order for the buyer to get financing?), and whether the buyer even wants or needs the repairs to be completed (are they an investor who will be gutting the house anyway?).
A word to the wise: If during an inspection you're made aware of issues or complications with a property, in many states, you're now required to disclose this information to the next buyer. Instead of re-listing the property and hoping that the next buyer won't negotiate the issues, it may be worth trying to work out a deal, compensation, or reimbursement with the current buyer instead of starting back at square one only to have this issue resurface.
Fun Fact
An inspection contingency allows buyers to walk away from the contract for items discovered that were not immediately obvious. What do we mean by "not immediately obvious"? If, on a walkthrough of the house after you're already under contract, the buyer decides he or she cannot stand the paint color of the master bedroom, that does not qualify as a reason to terminate the contract. While they may, in fact, terminate the contract, they will likely forfeit their earnest money deposit if this is the excuse since the paint color was apparent before they agreed to buy the house.