Definition and Examples of a Home Inspection Contingency
A home inspection contingency is a clause added to a real estate contract during an offer to buy a home. When an offer to buy depends on the results of the home inspection, a buyer can cancel the sale or try to negotiate repairs based on the inspection results.
Home inspection contingencies are handled in many ways across the United States, depending on local customs and state laws. In most states, home inspection contingencies are part of the purchase contract. In some cases, home inspections are done before signing a contract to purchase.
- Alternate names: Inspection rider, due diligence contingency
Due diligence contingencies give you recourse as a buyer if problems with a home are found. For instance, suppose you found the home you wanted to buy. During the home inspection, the inspector identified a few issues that needed to be repaired. Because you have a home inspection contingency in your contract, you can negotiate for the repairs to be done by the seller or for the sale price to be reduced for the cost of the repairs. If the seller refuses both, you can legally walk away from the contract.
How Does a Home Inspection Contingency Work?
When a home inspection contingency is added to a purchase offer, the contract isn't binding unless the terms of the contingency are met. Home inspection contingencies are a significant factor in many real estate contracts, because they allow the buyer to cancel the sale.
In many states, the buyer gets a week or two to secure a home inspection. The time can be shortened or increased during offer negotiations.
Generally, you're not required to be present for the home inspection, but crawling around with the inspector helps you become familiar with the home you're looking at and any issues found.
The home inspector conducts a visual inspection and may make recommendations if their findings show areas of concern. Most home inspectors are neither licensed nor qualified to discuss findings that extend beyond their areas of expertise and will recommend that you have an expert look at it.
For example, if the home's water pressure is low, the home inspector will note the low pressure on the home inspection report and suggest that the buyer hire a licensed plumber to take a look. The cause could be tree roots growing into the plumbing system, or the pipes could be corroded, but a home inspector can't tell any of that from a visual inspection.
If the home inspector suggests further inspections in the report, the buyer may wish to call a specialist for advice. For example, any of the following could require an expert opinion:
- Pests and termites
- Heating and air conditioning
- Lead-based paint
- Easements and encroachments
- Foundation and basement
- Sewer or septic system
- Soil stability
- Trees and vegetation
- Water systems and plumbing
- Radon or methane gas
- Permits and zoning
When you submit a sales contract with a home inspection contingency, it is essential to conduct the inspection as soon as possible—the extra time could be helpful. If the home inspector says you should call an HVAC specialist to test the heating system further, you might have to contact several firms before finding someone who can come out within your time frame.
Your real estate agent can help you arrange the inspections and send the findings to the seller in a timely manner.
What It Means for Homebuyers and Sellers
You should ensure that you know any contingencies and how they will affect your decisions and purchase as well as when the contingency will be released. To determine when a home inspection contingency should be released, you can read your purchase contract. Depending on the details that you worked out with the seller, it could be that it does not automatically expire unless you take a specific action, such as signing a contingency release.
The International Association of Certified Home Inspectors provides information about home inspections by state and can direct you to your state's home inspector licensing agency.
If the contingency expires before you report the inspection findings to the seller, your earnest money deposit may be at risk. If you try to cancel the contract based on a defect disclosed in the inspection, be sure to do it before the deadline.
For instance, a California Residential Purchase Agreement contracts give a buyer 17 days by default to conduct all visual inspections, which includes a home inspection. It also continues if the buyer does not release the inspection contingencies by signing a special document.
Not every listing agent is careful enough to follow up on contingency releases. If you're selling a home, and your agent doesn't demand the contingency release for inspections, the buyer could cancel up to the day the sale is supposed to close. Both buyer and seller should take careful note of all deadlines and expiration dates to ensure the contract is followed and the deal is satisfactory and successful.
- A home inspection contingency is a clause or rider in a purchase contract that makes the success of the sale contingent, or dependent, on the home inspection results.
- A home inspection contingency protects the buyer if a home inspection reveals something that makes them not want to go forward with the sale.
- Although sellers might not enjoy home inspection contingencies, they provide an incentive for the buyer to move forward with an offer.
- Buyers must take care to complete inspections within deadlines outlined in the contract or risk forfeiting their earnest money.