A home inspection or due diligence contingency is a standard part of most real estate contracts. It allows the buyer to request and pay for inspections and investigations of specific components and structures on the property within a specified time frame after contract acceptance.
The contingency typically lists specific contingencies that cover termite inspection contingency, lead-based paint inspection contingency, septic/well water contingency, etc. Standard contingencies are included in home inspections to help protect the buyer from any unforeseen circumstances that could delay or otherwise jeopardize their ability to close on the property.
Due diligence contingency is used when the buyer wants to have the property inspected by a professional or expert who can confirm no issues concerning their purchase.
This is why the buyer and seller of a house need to disclose all information regarding any property defects. Although inspection contingency allows for a certain degree of protection for the buyer, it is only as good as the information disclosed to them.
What is the Home Inspection Contingency?
The home inspection contingency is a contract clause that allows the buyer to inspect and investigate specific components or features of the real estate property after contract acceptance and before closing.
Most standard contingencies include termite inspections, lead-based paint, septic system, and well water. However, the specific terms and conditions for this type of inspection contingency will vary. Some states allow for more specific inspections such as pool and spa, well/septic pump, and oil tank inspection.
The home inspection contingency clause is essential because it allows the buyer to carefully examine and determine whether or not they would like to purchase a property. It will allow them to cancel the transaction if any defects are discovered.
The inspection contingency is used when the buyer is not completely satisfied with their purchase. It allows them to cancel the transaction within a certain period after acceptance and get back their deposit.
Some benefits of inspection contingency are that it protects the seller against any false claims from the buyer who wishes to walk away from their responsibility to close on a negotiated purchase without returning the necessary monies that they received from their real estate agent.
There are also a few risks to inspection contingency. The results of an inspection report could be surprising and unexpected, resulting in a lower selling price for the property. The buyer may also want to renegotiate the price or close the transaction date.
The inspection contingency also allows for the possibility that an unresolved issue is present, resulting in a lawsuit between both parties after closing.
What is the Coverage of Home Inspection?
Generally, the home inspection contingency covers various aspects that determine the property’s safety and livability. There are two types of Inspection Contingency coverage:
- Exterior Inspection
- Interior Inspection
Exterior inspection and interior inspection occur and are typically allowable within a specific amount of time after accepting the offer, which may vary depending on the state in which it is located.
The exterior inspection includes outdoor components that can be seen from the outside, such as roofing, window, and door condition. The interior inspection features items usually not visible to people who do not live in the home, such as wiring and plumbing.
1. Exterior Inspection
The exterior inspection is used to determine the condition of the building’s external components, including the roof, foundation, windows, doors, and any other areas that people would see when approaching or entering the home.
- Walls: This includes siding, brick/stone, stucco, and other building materials on the house’s exterior. Inspection contingency will also cover any cracks or holes present in the walls.
- Roof: The home inspection contingency clause typically includes shingle condition, chimney condition, gutter condition, and eaves trough.
- Windows/Doors: The windows are inspected for their operation (double-hung, single-hung, sliding), type (vinyl, wood, aluminium), and condition (broken/cracked). For doors, the same door types are inspected.
- Foundation: As the structure begins to rise, this is composed of a foundation made from brick, wood, or steel. Inspection for this contingency will determine if the house has a solid and sturdy foundation that is not bowed out or pulled away from home.
- Decks/Patio: This is an important area to inspect because it may have been built with pressure-treated wood contaminated with harmful chemicals. Other structural aspects include beams, posts, joists, and supports. The exterior inspection would not typically cover items that are not structural, such as railings and steps.
- Carport or Garage: The exterior inspection contingency clause will cover the condition and integrity of the attached carport or detached garage.
- Driveway: Areas to inspect for cracks, potholes, and other problems, along with any curbs and sidewalks near the house.
- Drainage: The inspection will cover the condition and any problems with drain tiles, sump pumps, and downspouts.
- Foundation Drain: The perimeter drainage system is a type of drain that prevents groundwater from accumulating around the foundation and causing flooding.
- Gutters/Eavestroughs: These are used to direct water away from the house’s foundation. They help prevent the house from rotting, wood-destroying insects and mould growth.
- Grading/Landscaping: This includes the condition of the soil and plants surrounding the house. Also, any grading issues may have a huge impact on water drainage around the foundation.
2. Interior Inspection
Interior Inspection covers home features not visible from the house’s exterior, such as plumbing and wiring.
- Plumbing: It includes any installed water, heating, and waste disposal systems found within the property’s walls. There may be PVC materials, copper, or lead components within this area. Inspection for this contingency will determine if there is a proper ventilation system in place and a water heater that is properly vented. Any signs of leaks from the plumbing system should be reported to the seller immediately, including an estimate for repair costs.
- Electrical Systems: This includes any electrical systems throughout the home, including outlets and switches connected to the fuse box or circuit breakers. Inspection contingency will determine if there are no exposed wiring and faulty equipment that presents a safety hazard for the new homeowners.
- Water Heater: This device heats water for use in the home. Inspection contingency will determine if it has proper ventilation, is not leaking or rusted, and is appropriately connected to the electrical systems within the house.
- Appliances: This includes any appliances provided by the seller, such as ovens, stoves, dishwashers, refrigerators, and microwaves. Inspection contingency will also cover any gas or electric appliances used for heating water, such as water heaters.
- Roof Sheathing: This includes wood or metal sheeting used for roof covering. Inspection for this contingency will determine the condition of the sheathing and any damage caused by water penetration.
- Attic: Areas to inspect include the structure itself, insulation, ventilation system, and possible water damage.
- Interior walls: This covers the interior wall surface (drywall) and the moisture barrier. Inspection for this contingency will determine if there are no signs of water damage or seepage. There may be previous repairs that require further inspection to ensure thorough sealing.
- Ceilings: This includes the drywall and any moisture barriers. Inspection for this contingency will determine if there is no water damage or seepage and if previous repairs have been done properly.
- Doors/Window Frames/Casing: These areas are inspected for anything that appears unusual, including deterioration of wood components and loose hardware. Inspection contingency will determine if there is no damage due to water leakage.
- Floors: This includes both hardwood and carpeted floors. Inspection contingency will determine if there is no sign of water damage, wear and tear, buckling, or excessive spots where the flooring has been repeatedly cleaned or polished.
- Staircase: These include the steps and handrails and any evidence of deterioration or damage. Inspection contingency will determine if there is no sign of water damage, wear and tear, and excessive polishing.
- Electrical Fixtures: Every fixture should be inspected, including switches and outlets.
- Cupboards: These include any interior cabinets, including those on walls. Inspection contingency will determine if there is no sign of water damage or cracks along the seams on the doors.
- Walls/Baseboards: These areas are inspected for visible signs of water damage, including stains on walls and baseboards.
What are the Examples of Home Inspection Contingency?
Once the offer is accepted, the home inspection contingency allows buyers to have an independent professional conduct a thorough examination of the property’s major systems and components.
Some examples of home inspection contingency include the foundation of the property. Inspection contingency will allow the buyer to ask for an inspector to examine the foundation further and make recommendations. As mentioned earlier, there is potential for this area to be built using pressurized wood.
Other examples of a home inspection contingency would also include the electrical system within the property’s walls. Inspection contingency will allow homeowners to hire an inspector to look at the wiring and determine if it is up to code or has any damage that may present a safety risk for the new homeowner.
Another example of home inspection contingency includes appliances. Inspection contingency will allow the buyer to ask for an inspector to come out and determine if all the appliances are in working condition.
How to Remove an Inspection Contingency when You Buy a House
Removing an inspection contingency when buying a home can be done in two ways. One way is to purchase the property “as-is.” It means that the seller will make no repairs. The other option is for the buyer to ask for an increase in their closing costs to cover any potential problems or fixes that may arise during the home inspection.
You can fix house problems by doing repairs yourself or having a contractor fix them for you. If the cost of the repairs is equal to or less than a couple thousand dollars, it’s probably worth fixing on your own. Fix house problems like leaky pipes, broken windows, and defective wiring to avoid potential problems in the future.
How and When to Waive the Inspection Contingency
If a buyer waives a home inspection contingency, they state that everything passed the standard inspection and that no further work is needed. It means that the property fully complies with any criteria outlined by the real estate purchase contract.
Typically, if there are costs to be reimbursed from the seller to the buyers, the sellers will not waive the inspection contingency. However, if there are no costs to be reimbursed, like in a cash transaction, it may make sense for them to waive the inspection contingency.
No inspection contingency is beneficial, but only if they agree to all of your requests and you have complete confidence that the seller has addressed everything in the necessary ways. Waiving it is good because it shows that they have absolute confidence in you as a buyer.
It may also be a bad thing because they may be hoping that you waive it, so they don’t need to do any work on the property. If they are hoping for this, there is a better chance of more work needing to be done on the house after purchasing it.
What are the other Real Estate Terms similar to Inspection Contingency?
There are many other real estate terms similar to the inspection contingency. Some that you may come across include:
- Due diligence contingency: If buyers encounter problems due to undisclosed issues with the house, they can call off the deal.
- Contingency clause: A contract lets buyers back out if they fail to obtain financing.
- Exclusive listing agreement: A seller will get a selling agent to represent him but agrees to sell with that person and not sell with anyone else during the entire period.
- Earnest money deposit: This is usually 1-3% of the home’s asking price and goes towards your down payment or closing costs.
- Subject to contingencies: This means that a sale is pending certain conditions. If the conditions aren’t met, you may lose your deposit or have to pay an additional fee.
Subject to property inspection: This usually means that you perform a home inspection before closing on the house and determine any repairs needed. If issues are found, you can ask for them to be fixed before committing to the sale.