A home inspection contingency is generally recommended for all homebuyers. With a home inspection contingency, you get to thoroughly examine what could be wrong with the home before closing escrow.
Perhaps just as important, a home inspection contingency enables you to back out of a deal if you find something you don't like. It's like a get out of jail free card. At the very least, you can use the home inspection to knock down the asking price.
There's just one problem. In a competitive real estate market, putting in a home inspection contingency is often a deal killer. Sellers want as few contingencies as possible, which often includes waving the financing contingency. The fewer the contingencies, usually, the stronger the buyer. And the stronger the buyer, usually, the higher the chance a deal will go through.
In my price concession letter post, I had written that I had waived home inspection contingencies for my last two property purchases. Come to think of it, I waived the home inspection contingency for the fixer I purchased in 2014 as well. As a fixer, I already had the intention of gut remodeling the home.
Let me share why I waived the contingency and why you might be OK waiving it too.
Why Waive The Home Inspection Contingency
Here are the main reasons why you would waive the home inspection contingency:
1) You're trying to buy a home in a strong housing market
2) You're an experienced real estate investor
3) You have remodeled many times before
4) You have a contractor who will inspect the home before you make an offer
5) You want to save on the home inspection fee ($500-$2,000)
6) You have a financing contingency to give you an out, as opposed to a no financing contingency
Here’s an important point of clarification.
Waiving the inspection contingency doesn't prevent you from having a home inspection. It just means you won't be able to use results from an inspection to negotiate remedies or price with the Seller. If the inspection turns up something that makes you want to walk away, you still can.
Homebuyers Have Plenty Of Time To Inspect The House
Even in a hot real estate market, homebuyers usually have at least two weeks to inspect a house. There are usually a couple of brokers tours and two weekend open houses before an offer date is set. According to Zillow, a house spent an average of 25 days on the market.
In a regular housing market, the average house can easily stay on the market for 45-60 days. And in a soft housing market, houses can sit for years. Therefore, you usually have ample time to inspect the home you're considering purchasing.
You can easily visit a house five or six times in a two-week period. The first visit can simply be you checking things out on your own. If you like the house, you can set up a private visit with you and your contractor, handyman, experienced remodeler, partner, etc. The more people you can bring to the open house to look for things, the better.
If you want, you can even pay a professional inspector to do a walk-through with you as well during the open houses. The listing agent should be OK with this since he wants the most serious buyers. Further, a listing agent can't discriminate against who can come to the open house.
A buyer who is thorough before making an offer will usually throw up fewer surprises during escrow. Therefore, their offers should be more attractive since they have a greater chance of completing escrow.
However, if you need more time as a buyer, then here are some strategies to delay the close of escrow without losing the home.
The Difference Between Inspecting A House Before And During Escrow
One misconception potential homebuyers might have is that there is a big difference between inspecting a house before escrow and during escrow. The reality is, there's not much difference at all.
There are no secret areas a home inspector gets to unlock and inspect after you get into escrow. Nor can home inspectors start opening up walls unilaterally without permission.
A home inspection consists of:
- Checking for leaks, dry rot, mold, and stains
- Inspecting the roof, windows, drywall, plumbing (copper or lead pipes), electrical (knob and tube or Romex wiring), fireplaces, appliances, faucets, sinks, floors
- Making sure the house is up to code and pointing out areas where the house is not
- Examining the foundation for any structural issues and excessive settling issues
- Providing an estimate on the cost of fixing and updating certain things
- Highlighting damaged areas that may have been covered up that may need more investigating
- Make sure all electrical outlets, heater, dish washer, microwave, range, refrigerator, solar panels, speakers, showers, toilets, bidets, etc work.
- Estimating the proper square footage of the home to match the advertised square footage and tax records
The home inspector is basically trying to find anything wrong with the house that needs repair or updating that are not in the seller's disclosures. You can help the inspector by pointing out issues you notice in the disclosure statements. The seller of the home usually has an inspector come in as well.
If you've ever remodeled a home, you will have a keen eye for what to look for.
Waiving A Home Inspection Is Still A Gamble
If you believe your offer still has a chance of being accepted with a home inspection contingency, then, by all means, put one in. Having a home inspection contingency for a large purchase is the responsible thing to do.
If you waive a home inspection contingency, you're taking a greater risk that some unforeseen costly or dangerous issue might pop up after your purchase.
If you don't have a home inspection contingency or financing contingency and back out, you may lose your 3% earnest money deposit. Therefore, your offer price must take into consideration potential surprise costs.
I will say that buying a home with contingencies feels great, if you can get a seller to agree. Once you have contingencies in your offer, there is no risk to your earnest money deposit in case you change your mind.
Waiving A Home Inspection Contingency In A Good And Bad Market
In a bull market, it's easier to waive the home inspection contingency because chances are higher the home will continue to appreciate. Therefore, any surprise costs that come up can be more easily digested. Waiving a home inspection contingency will also increase your chances of getting your offer accepted.
In a bear market, it's better to have a home inspection contingency because you want an out or a bargaining chip in case you find some issues you don't like. If you find some issues, you can then negotiate to lower the price. Further, there's a much greater chance a home inspection contingency will be accepted in a soft housing market.
You may also want a home inspection contingency on older houses and brand new houses. Brand new houses, like brand new model cars, often have unforeseen issues because the house hasn't yet been battle-tested through the years yet. For example, who really knows the roof won't leak yet if it hasn't been through a major rainstorm?
The reality is, buying anything is a gamble. You just have to determine how much more risk you are willing to take by not going through with an inspection. Here are the 10 main warning signs to look out for before buying a house.
Putting In A Home Inspection Contingency Could Make You Poorer
Almost everything within a home is fixable. You can even tear it down and start over if you want to. You just need to make sure your offer price has some buffer to account for any surprise costs. And part of making a good offer price is understanding how much things cost, e.g. rewiring a house, changing plumbing, moving walls, painting, foundation work, building a master bathroom, etc.
However, if you miss out on a home purchase due to the seller rejecting your offer with a home inspection contingency, you could end up missing out on tremendous upside.
In 2021, alone, the national median home price was up around 18%. We're talking ~$65,000 of missed home equity upside. If home prices rise another 8% over the next 12 months, then we're talking an additional $30,000 of missed home equity upside. Of course, home prices could also soften as well.
If I had not waived my home inspection contingencies on my last three home purchases, I would not have been able to buy them. I faced competing buyers in all three cases who didn't have home inspection contingencies. Further, some were all-cash buyers. However, for every house I bought, I brought a long a contractor to go through everything.
Based on how home prices have performed since 2014, I would be poorer today if I had not gone ahead with the purchases. Of course, there are no guarantees of increased appreciation after purchase. Prices could have easily gone down as well.
Read The Disclosure Statements
Before making an offer, you need to thoroughly read all the seller's disclosure documents to understand any issues that have come up with the house in the past. The disclosure documents should also highlight any potential liens, easements, and neighborhood issues. A responsible seller should have all documentation about any major repairs.
Personally, I keep a spreadsheet with all money spent on repairs and improvements. This way, I can easily use some of the appropriate costs to increase my cost basis to lower my capital gains tax liability if I were to sell.
As a buyer, I love receiving a detailed spreadsheet with invoices for all remodeling and repair work. It shows me the seller is meticulous about upkeep. It also gives me peace of mind that various things have been fixed over the years.
The more detailed the disclosure statement, the more at ease you should be about not doing a home inspection. With every job done, there should have been a licensed professional doing the work. And most licensed professionals are looking to do more work once they get to your home.
If you have a disclosure statement with not a lot of information, then you should feel less at ease about not doing a home inspection. Sure, the house could really be maintenance-free. However, you just never know.
Home Insurance To Protect Against The Unknown
If you buy a home with a mortgage, you will be required to get homeowner's insurance. Therefore, your homeowner's insurance should provide some peace of mind if you waive your home inspection contingency. You can also get a home appliance warranty as well. However, make sure you know what your insurance policies cover.
If you buy a home with cash, you may not be required to get homeowner's insurance. However, it's always a good idea to get disaster insurance just in case the worst happens.
Personally, I'm going to continue to waive the home inspection contingency for houses I really want. Before making an offer, I will visit the house multiple times with multiple people for hours. We will have a checklist of all the things to look out for before putting in an offer.
As someone who has done multiple remodels down to the studs, I know what to look for. I've seen all the shortcuts subcontractors have done and understand the range of quality of materials.
Everything is fixable, for a price. But safety is paramount. The biggest safety hazards are faulty wiring, weakened structural support, and a crumbling foundation. Make sure you thoroughly inspect these parts of the house before putting in an offer.
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A Home Inspection Contingency is a FS original post.
We waived inspection, financing, and appraisal contingencies on our home purchase outside Boston last year. Along with making the bid more competitive it actually saved us money. The seller chose our offer over one that was $35k higher since ours was perceived as a sure thing. To add to the points made here, this type of discount needs to be factors into how people think about risk. The likelihood of finding a $35k repair in a house we preinspected is pretty low.
I waived inspection, appraisal and financing loan contingency for my most recent purchase in the Bay Area. I had to do so last time as well. I feel like sometimes that’s one way to get the property in the Bay Area :(
There is so little inventory so far in 2022. Shocking. Down 40% YoY nationwide. You’re probably going to do well with your purchase. Congrats!
Our market is extremely competitive. We have 5 days to submit an offer before the house is sold. Sellers procure home inspections more likely than not in our market. 200 groups through touring a home and up to 30 offers on a house means a lot of wear and tear on repetitive home inspections. But in one case, we were lucky enough to have our buyer’s offer accepted with an inspection contingency. We discovered some electrical downfalls so we asked the sellers to pay $9k in our buyers closing costs instead of fixing, repairing or changing the price.
That is pretty lucky with so much competition. And yes, good reminder the sellers sometimes have their own home inspection report. Review that and ask them if anything came up with other potential buyer inspections.
Unfortunately folks are skipping the home inspection and later finding out that they needs repairs, sometimes major repairs that are unexpected, and not in the financial budget. If your investing and flipping and have the skills or resources to fix those repairs fine. You’ll likely recoup the repair cost. But for a homeowner looking to buy their dream home, skipping that inspection is many times the idea of the realtor in order not to lose the deal. These homeowners can potential get into a real financial situation if they don’t have the funds to cover some major repairs that may show up after they move in. Do whatever you can to get your home inspected.
Great article Sam! We bought our house in 2016 in a hot market and neighborhood (near where you grew up) and had to waive all contingencies. One of the reasons we lost out on the first house we offered on was due to having an inspection contingency (also wasn’t the best offer).
I will say that the hot houses in our market do not provide two weeks to inspect the house. The typical timeline for (desired) house sales is, they go on the market on Thursdays and offers are due by the following Tuesday. So they will typically have an open house on Saturday and Sunday. We toured our house on Saturday and paid to have it inspected on Sunday. Doing this made me feel better about waiving everything and worst case we were out the $500 or so for the inspection. Then it an Ebay style process for the offer with a starting bid, increase increment and top price. The offer we beat had a lower dollar offer (by our increment amount), and left the financing contingency in. They did offer 40% down to our 20% though. I didn’t understand why they would have a financing contingency since they should have been a lock with that much down. My guess is this was just a last resort out for if something was majorly wrong with the property and the bank wouldn’t finance. So it acted as a backup home inspection contingency.
Hello, I am from continental Europe and we have a different legal system and I know it is not a law forum but still I want to ask: if a buyer does not do home inspection and later he finds out that, for example, a roof has some HIDDEN damages which were not avialable to detect at the moment of buying, does he have a right to go to court and ask to compensate repair costs?
I’m not a lawyer, but a person can sue for anything. Just costs time and money.
Usually, reasonable people settle out of court with a compromise.
I read plenty of articles last year that quoted potential home buyers in 2021 not willing to waive the home inspection due to unforeseen cost risk. They realized that they lost out to those who did waive it. To me, not doing what it took to get into the hot market was the real risk. Where I live, every day not getting into contract was equivalent to adding a couple thousands of dollars to the price of the same home. Furthermore, in many states you can walk away after a set number of days in contract.
I agree a home’s foundation is critical in judging a home, but a lot of inspections will state that the foundation inspection is limited due to coverings. Lifting up all the flooring is the true tale of the slab condition.
Agreed – Most homes in my area went up by ~$100k in value last year. That’s $275/day. Waiting an extra 6 months cost you $50k with only marginally higher knowledge of the condition of the property than if you and your realtor just looked around yourself. I’ve waived the contingency on every rental I bought in the last two years, although twice I found some things myself post signing that I asked for, and received a concession (once from buyer, once from buyers agent) of $1,500 or so. And I saved the $650 inspection fee as well. I don’t need an inspector to tell me if the AC unit is old and/or working. I can do that myself.
And as you said, unless you are going to take up the floors before buying, you won’t really know about the foundation and you can’t do that.
Looking at it more granularly really shows how much delaying cost.
Yet, it still feels bad to tell people to waive a home inspection, especially if they are inexperienced.
But one just had to bake in these potential fixes into the offer price.
That’s what we did as we did a gut remodel on the ground floor. Homes settle over time and we poured new concrete and built up new wells and installed plywood for more structural support.
If you’re planning on guy remodeling anyway, the home inspection becomes less valuable.
Some good points, and I’m glad you stated it’s still a gamble if you skip it. Personally with a home being such a major investment, especially an older home, there are thousands at stake if you skip it, not to mention the headache. Good points though on if you’re experienced or an investor. It’s not something I’d want to rush or skip, I feel for buyers today.
Great inights…Sam, Can you plz write or put some thought s on buying New homes versus Old homes (~ >20 years old) that need renovation or reniovated versus buying New homes esepcially these dyas happening in SF bay area with people going far Tracy, river islands? Thanks,
I would always get an inspection. There are things that you won’t know until you get one. For example on my last home inspection, during the open house the seller said the heating boiler was six years old. What was six years old was the hot water heater, but the boiler was 14 years after we open it up. The roof was also double layered and not single layered like they said. Those are big ticket items and I was able to negiotiate the purchase price down 10k. They also found a bunch of other things I wouldn’t have know to look for. I know in a hot market you just want the house, but at what cost if the roof is going to cost you an extra $15k to replace, etc. Get the inspection and know what your buying and use it as leverage.
If requiring an inspection costs you an extra 3 months till you found the house, you just lost your $15k last year there nationally (more if you are financing the house). In metros, same with just 2 months. Until the housing inventory gets even remotely back in line with historical, home inspection requirements are just going to cause you even more money than they save the vast majority of the time. Yes, occasionally, they will work out but even inspections miss a lot of things. The one and only major issue (foundation) I’ve ever had on a home I’ve bought before (2015) I did pay for a very reputable inspector but he missed the foundation issue entirely that we discovered ourselves two years later when we went to change the flooring to hardwoods.
What was wrong with the foundation and how much did it cost to fix?
The dirt below the foundation in one area of the house was not compacted well so the corner sagged over time, causing a crack in floor and ceiling (house was 9 yrs old). Needed several helical piers to fix. All in all, could have been worse. Was a bit over $10k. Same fix today I imagine would be $15-$20k.
Got it. Not too bad. Homes definitely settle over time.
I do get that, in this market… however, people are going into open houses spending 15 minutes looking at house and plopping down half a million or more to buy a house. IDK, but I want to know what i’m buying and committing to for 30 years. A lot of people have regretted their purchase because of the pressure to buy now. What does that cost?
Be careful relying on homeowner’s insurance as a backup plan for skipping the inspection. Homeowner’s insurance will cover for sudden losses and accidents. If your foundation is cracked, or if the wiring has fallen into disrepair, HO insurance won’t cover the repair costs. If the house burns down or slides down a hill, you will probably be covered, but if the cause of those accidents is determined to be a neglected maintenance issue, you might not even have coverage for that.
I know the market is super-heated right now, and you might need to waive an inspection contingency to get your offer accepted, but that’s a really risky move. I don’t think I would do that myself, especially if there’s any chance of a major defect that you’re unaware of (e.g. a house built on a hill that might have defects in structural supports, or a very old house that might not have been remodeled safely). If it’s a house built within the last 20 years or so with proper permits, it’s a lot less of a gamble.
We waived the home inspection contingency for the fixer upper we purchased in November 2020. The single family home was one mile from downtown on a large lot with an ADU that had separate utilities which was perfect for renting to multiple tenants. At $150,000 we could see some other investor plopping down an all cash offer. We saw what a deal it was and after walking through the house the first time, we knew that we had to have it. We set a date for a quick closing and didn’t have any contingencies. My husband is a handyman and we looked for all the things listed in this article before making the purchase offer.
One thing I would caution readers about is relying on homeowner’s insurance to take care of repairs because homeowner’s insurance policies specifically states the ‘covered perils’ in which it will pay for and poor workmanship/building code violations and deterioration due to age are not typically covered. A covered peril is usually damage caused by a natural disaster, fire, explosion, etc. It’s very important to read the insurance policy documents carefully to fully understand what is covered.
One more strategy is still have inspection clause – but waiving any/all repairs/issues — anything under amount $X (say $10k) per item.
Ie., you are only concerned about big ticket unexpected repair items/problems; and that you are not interested in nitpicking on littler/nuisance items.
If Seller is confident that there are no big-ticket items he/she is aware of — then why be concerned with inspection (of course – the Buyer can still potentially backout with a friendly/convenient inspector — all Buyer saving say 3% escrow).
Financing contingency is a bigger issue however!! Consider Hard-Cold cash offer with cleared funds (a recent bank/brokerage balance statement would definitely help)
Do lenders require an inspection report and proof of needed repairs before financing the home loan? If so then it seems the inspection contingency cannot be waived in that case.
You can waive the inspection contingency as a buyer, but the lender will still require an inspection be performed and report submitted. If something major is wrong (cracked foundation) then the lender can say no to the financing, giving you an out. So if you leave the financing contingency in it essentially doubles as an inspection contingency. The inspection contingency is better for if you think there is room to negotiate on smaller repair items, typically in a cold market or a house that has been listed for awhile. This is based off my experiences buying in a hot market.
So true that any purchase is a gamble. But the more we can do due diligence the more confident we can feel they are good, fair, or bad purchases. Very helpful advice. So many variables when buying real estate!