Welcome back to my series, Demystifying the Real Estate Offer. We decided to write an offer, the paperwork is done, the comps have been reviewed, you picked a great offer strategy, and now you are under contract. Now let’s blow up some of the things that can go wrong in a real estate transaction. And, of course, we have to start with the home inspection!
Home inspections are one of the most common things that can go wrong in a transaction and cause it to fall apart.
This is also why you see sellers in competitive markets trying to stay away from them, if possible. Why does this happen? Sometimes it happens because the buyer wasn’t ready and gets cold feet. It is exciting to decide to buy a house, but reality can hit when you are standing in the house with a home inspector looking for everything “wrong” with a house. Buyers are looking at houses differently than they did a few decades ago. Buyers today expect a level of renovation and luxury that buyers before did not. These high expectations can be ruined with a “bad” home inspection report.
I should probably say here that there are no bad homes.
What each buyer wants is different – some want a tear down, some want to renovate and build their own equity in the home, and some want turn-key. It isn’t a bad house if it isn’t what you want – it just isn’t… what you want. And great news, you don’t have to buy it! Well… unless you made our first mistake.
You waived your opportunity to conduct a home inspection.
The first mistake you can make is not building in your ability to do a home inspection. You didn’t do one before your offer and you can’t do one now. You are rolling the dice and hoping for the best. Now if you are an investor with experience and you have a good idea of your risk tolerance, this may be just fine. In fact, you may plan to tear the whole house down and start from scratch. But if you are buying the house for you, and you don’t do this all the time, and don’t have unlimited resources that you want to dedicate to building your perfect home, you should not waive the opportunity to conduct a home inspection. If, as part of your offer strategy, you decide not to build in a home inspection, you can ask the seller if you can do a pre-inspection, where you inspect the property before you submit your offer.
But in this scenario you didn’t – and now you have purchased a home. You knew you wanted to re-do the kitchen and when your contractor shows up, he is shocked. There are major structural problems and the foundation of your house is not supporting the structure of the home and needs to be fixed to the tune of thousands. You can imagine any situation here – from: you didn’t know that the HVAC systems were not installed to code, the electric panel is a fire hazard, or the roof is shot and needs to be replaced now because water has been dripping in the attic for years and is growing mold. You get it!
Ok, so you would never do that. You did put in an opportunity to do a home inspection but it is a right to cancel only — and now you want to negotiate.
(All is not lost, there are some tips to get through this on a case-by-case basis. But none of those work here, because in this scenario, everything goes wrong!) You have a choice to make – exit the deal inside your home inspection contingency (number of days you agreed to) or move forward without any seller repairs or seller credit in lieu of repairs. This is better than the last situation because now you know some repairs are needed and, hopefully, you also had contractors estimate the cost to repair them.
As a quick side note, even if you have the right to negotiate your home inspection, it does not mean the seller has to say yes to your requests. You negotiate and the seller can say no to all requests. It is important to keep in mind that the home inspection requests are typically to correct safety issues or major repairs you didn’t know about and couldn’t have really known about during your showing appointment. It isn’t for making the perfect house that has no repairs needed.
OK back to the explosion. You didn’t get your home inspection done on time (either the actual inspection and/or the home inspection notice).
Your home inspection contingency gives you the right to have a home inspection and potentially other contractors come through the house (eg. Chimney inspection, mold inspection, etc.) for a specified number of days after ratification. Let’s use 5 days as an example. You have 5 days to have the home inspection and any other inspections you have the right to bring into the home per the contract, and if you want to negotiate or cancel the transaction, you have to be done by the time deadline on the 5th day (these vary based on the contract you use). If you miss the deadline, you have lost your ability to do either of these things. Sometimes the seller will be forgiving, but please note they do not have to be. And if you walk away from the transaction after your home inspection deadline and you do not have another legitimate exit, the seller can keep your earnest money deposit. If you try to demand it back, they can sue you.
Sometimes you discover that the home is falling apart or needs major renovations you didn’t know about.
I recently heard from a colleague about a home inspection where water was getting behind the siding, which had been incorrectly installed. They suspected that the siding would need to be removed and redone. And who knows what is behind the siding that you will discover when it comes down. Sometimes, even when houses are in bad shape, the seller will make major modifications to the contract to keep you in it. If there are a lot of repairs to make that they didn’t know about and they really need to sell, they may be willing to appropriately compensate you so that you buy the house and do these repairs yourself. Other times, sellers are not willing to see their house the way that you do. In these cases, they will likely not agree to the terms that you want. And in those cases, you have to present what you are willing to do and if you don’t get that, you have to be willing to walk away. House transactions are full of emotion. These houses are not just structures, they are where people have raised their families and they love them. They do not want to be “disrespected” by someone who “doesn’t see the home’s value.”
How do you avoid home inspection issues on your purchase?
- Make sure you have the right to do a home inspection
- Understand your risk tolerance and talk to your agent so that you have the right in your contract to do the inspections you want to do and enough time to do them
- Don’t just sign the contract your agent presents – make sure you know what rights you have and put the deadlines on your calendar so you don’t miss them
- Make time in your schedule that first week after you go under contract so that you have the time to go to the home inspection and review the materials, estimates, etc
- Make sure you hire a licensed and knowledgeable home inspector
- Bring in additional contractors to evaluate situations you find in your home inspection and get estimates for repairs
The next video is going to look at radon and termites/wood-destroying insects.
