While we realize this might not be the most riveting of our articles, it is without a doubt one of the most important. Not having an understanding of how home inspections work can literally leave you with thousands of dollars on the table. Don’t let that happen to you!
SO REALLY, WHAT IS A HOME INSPECTION CONTINGENCY?
When writing the contract, the purchaser has the option to include a home inspection contingency. There are two types of inspection contingencies.
- The first is the standard inspection contingency which allows the purchaser to have a licensed home inspector conduct a home inspection on the property and from the findings either negotiate for repairs or void the contract.
- The second is what is known as an “up or down” inspection contingency, or a contingency with a right to void only. This means the buyer can still void the contract if they don’t like what they find in the inspection, but they cannot negotiate for repairs.
During either contingency period, the purchaser is also free to do any other type of inspection they might want to do including roof, pool, chimney inspections, and mold or radon tests. Without either of these contingencies, the purchaser is still able to do an inspection for their own informational purposes (if approved by the seller), but cannot void the contract or negotiate repairs if they don’t like what they find.
WHAT HAPPENS AT THE ACTUAL INSPECTION?
The inspector, the buyer, and the buyers agent attend the home inspections.
If you’re a seller, you should not be present at the home. We know… your home is under contract so you’ve let things slip, but it’s time to get things back in show condition! Put away the dirty dishes, replace burnt out light bulbs, change the HVAC filter and make sure the electrical panel and attic or crawl space entries are accessible. If you don’t have smoke detectors on each floor and in each bedroom (or they don’t have batteries), now is a good time to install them.
If you’re a buyer, plan to be present and pay attention. It’s three hours, so they can often become long-winded, but they are a great opportunity for the inspector to teach you about your new house. If you have children it is important to hire a babysitter off-site or at a nearby park so you can focus on the inspection.
The inspector will point out where to find important system access points (such as the water shut off valve), how often to change filters, how to maintain appliances, and other seasonal maintenance tips that can save you money down the line. The inspector will also point out any safety concerns or repair items the buyers might want to ask the seller to address, or take care of as soon as they purchase the property.
In our market, sellers are not obligated to make any fixes since all homes convey in as-is condition. However, sellers will often make repairs, especially safety concerns or electrical and plumbing deficiencies. Items that are cosmetic or are considered “upgrades” are typically not negotiated as part of the inspection.
HOW DOES THE CONTINGENCY WORK FOR HOME INSPECTIONS?
If a home inspection contingency is part of the contract, one of the things the buyer will specify in their offer is how long they would like the contingency to be. Typically, we see seven days (or five business days), but it can vary from one day to two weeks depending on the situation. As with any other terms of the buyer’s offer, the seller can accept that timeframe, or counter with something shorter. In the seller’s eyes, the shorter the better so they know if the buyer will move forward.
For this example, let’s assume the buyer wanted a seven day home inspection contingency timeline and the seller agreed. So, within seven calendar days of the buyer and seller coming to agreement on all terms of the contract (which we call ratifying the contract), the buyer should plan to conduct any inspections they would like. Before the deadline, they will need to decide to move forward or void the contract, taking one of the below actions or inactions:
IF THE BUYER FAILS TO TAKE ACTION BEFORE THE HOME INSPECTION EXPIRES
If the purchaser fails to either void the contract or submit their list of requests with the home inspection report by the deadline, the home inspection contingency expires and the contract moves forward. The seller is now under no obligation to fix anything and the buyer is required to move forward. This doesn’t happen often, but we see it on occasion.
IF THE BUYER DECIDES TO VOID THE CONTRACT
In the event that the buyer no longer wishes to buy the house after the inspection, they can void the contract by sending a notice voiding the contract along with the inspection report. This option for the unilateral “out” by the purchaser is one of the reasons this contingency is the biggest hurdle in any real estate transaction.
This happens occasionally, but is usually done when a buyer gets cold feet. It’s always better to submit your requests for repair and try to negotiate with the seller before voiding.
IF THE BUYER DECIDES TO MOVE FORWARD & REQUEST REPAIRS
This is the most common scenario. Within the time frame agreed upon for a home inspection contingency IF the buyer has selected the contingency with the right to negotiation and not just the right to void, the buyers can request the sellers to make certain repairs, or can request a dollar amount to be credited from the sellers to them at settlement in lieu of making the repairs.
If the buyer decides to move forward and make requests, the process moves to the next step below, which varies depending on if you are in DC or Virginia. Essentially, the sellers would either agree to fix all items, none of the items, or some of the items.
VIRGINIA HOME INSPECTION
When the buyer writes the initial offer with the standard home inspection contingency (again – not if they selected the right to void only), they select two more dates in addition to the initial home inspection contingency period for a total of three dates. Again, the seller can counter the dates proposed by the buyer. Here are the important dates chosen in Virginia:
1) How long they want the initial contingency to be. This is the contingency period discussed above that is typically about seven days. This date is chosen for both types of contingencies.
2) For a standard contingency only: How long they would like to make the negotiation period. This is typically around five days. This timeframe starts when the buyer submits the copy of the home inspection report along with any repair requests to the seller. Within this time frame, the buyer and seller negotiate the list of requests. If they cannot come to an agreement by the end of that time frame, they enter the walk-away period.
3) For a standard contingency only: How long they would like their “walk away” time frame to be. The walk-away period is typically one or two days. If the buyer is not satisfied with what the seller will agree to fix or credit at the end of this time frame, the buyer can then decide if they will either accept the sellers last offer or void the contract.
In most cases, the buyer will submit a copy of the report along with a list of requests. There might be a counter or two in the negotiation period and then the buyer and seller will agree to the terms.
WASHINGTON, D.C. HOME INSPECTION
In DC for the standard inspection, there is no negotiation window. Instead, the buyer and seller alternate their own three day windows in which each gets an opportunity to respond. So, once the initial request is made, the seller has three days in which to respond. From whichever day the seller responds, the buyer then has three days to respond.
After the first back and forth, the other party always has the opportunity to either accept the terms of the last offer, counter the last offer, or deliver notice that the contract will be void if the other party does not accept their last offer.
In summary, the purchaser only requests one date – the length of the initial contingency. The other timeframes are automatically built into the contract.
There are two types of home inspections. One gives you only the right to void the contract. The other gives you the right to void, but also the right to negotiate. In this scenario, the home inspection is the mechanism by which the buyer has the opportunity to decide if the price of the house they are paying is appropriate to the condition of the house. It is their opportunity to understand what potential future costs will be in maintaining the home. The home inspector will also show you how to maintain the home going forward. It is not an opportunity to renegotiate the contract, only to request that deficiencies be corrected or ask for a credit to do the repairs. The seller can go a long way towards making this a smoother process by presenting the house is in great showing condition and fostering a welcoming feeling in the home. At the end of the day, it is where the final deal is made to move forward.