Most homebuyers include an inspection contingency in the purchase contract that gives you the option of backing out of the deal if you’re aren’t satisfied with the results of one or more professional inspections. Most buyers arrange a general inspection of their house’s physical and structural components to check out defects in the property, such as a leaky roof or heating problem. In many parts of the country, pest inspections are also common (and institutional lenders often require this).
Rare is the house that does not have a few hidden flaws or defects that you won’t know about until the inspection. After reviewing the inspector’s report, you’ll have to decide whether the problems can be fixed and whether you can live with them if they can’t be fixed; who (you or the seller) should pay for repairs; and what you’ll do if you and the seller can’t agree on who pays. Here’s an overview of the key issues.
Discuss with the inspector or outside contractors whether the problems can be fixed and how much repairs are likely to cost. A pervasive mold problem, for example, sometimes can’t be fixed, but repairing an old air conditioning system won’t typically require a team of specialists.
If a problem can’t be fixed, you must decide whether you still want to buy the house. In some states, your standard inspection contingency will say that you must give the seller a chance to fix a problem before backing out of the deal. But if the problem truly can’t be fixed, you should be able to walk away from the deal.
Your first inclination may be to ask the seller to pay for everything. You can certainly try, but don’t be so unreasonable that the seller says, “Forget it!” It really depends on the repairs and how necessary (and expensive) they are. If you’ve got some leverage—for example, you know the seller needs to move fast or that the house sat on the market for months before your offer came along—you can push harder for the seller to pay for all repairs. But if you know that the seller is sitting on a backup offer that is higher than yours, you’re best off keeping requests to a minimum.
If the seller agrees to be financially responsible for all or some repairs, the two of you can handle it in a variety of ways, including:
Have the seller credit you a portion of the purchase price. Normally, when a deal closes, the seller gets paid the full contract price. Instead, you can have the seller agree to have the amount needed for repairs transferred directly to you at closing or put into a special account, which you’d draw on after closing. (Lenders prefer the latter, because it gives you an incentive to make the repairs rather than pocket the money.) Of course, having the seller credit you money for repairs assumes you and the seller agree on the estimated repair costs and that those estimates will be accurate enough that you don’t get stuck with a big bill.
Reduce the sale price by the estimated cost of repairs. The advantage to this is that, with a lower purchase price on record, your annual property taxes will be lowered, as will your transfer tax if you live in a state where they’re required (and from the buyer, not the seller). And you can do the repairs whenever you like—though you’ll have to come up with the cash on your own.
Trust the seller to hire someone to make the repairs before the closing. Unless the repairs are fairly simple (such as a broken window latch), this tends to be a bad idea. The seller may do the repairs on the cheap or, worse, attempt a do-it-yourself job.
Hire someone to make the repairs before the closing, with the seller paying. This may raise more problems than it solves—if the repair takes longer than expected, you can bump into your closing date.
There may be situations when you’re responsible for the cost of repairs (maybe you got an especially great deal on the sales price and the seller won’t negotiate on repairs). You may plan to handle the work after you’ve been in the house for a while. Unfortunately, you won’t always have the option of delaying the repairs. Your lender may require certain repairs to be done before the deal is finalized. If you’re paying for those repairs, discuss this with your mortgage broker—creative solutions are possible, such as taking out a larger mortgage to cover the repairs or reducing your down payment to free up the cash.
Sometimes, a general inspection will reveal that another specialized inspection is needed—for example, if the general contractor who did your inspection has identified drainage problems on the property and recommends you consult with a soils engineer. If you’re close to the deadline when you must remove an inspection contingency, and you want to arrange more specialized inspections, you’ll need to ask the seller for additional time (in writing). The seller may say no, perhaps as an excuse to back out of the deal. Most sellers, however, are motivated to close the deal and will agree to a reasonable request.
If you're buying a new home, be sure you negotiate a "final inspection" contingency, which allows you to bring in a professional to approve the completion of the house before closing. Be prepared for unpleasant surprises—legions of homebuyers have discovered unfinished construction or major defects just days before they were supposed to move in, such as:
If you discover any defects in your new house, you have several options:
Delay the closing. This is your most obvious choice, but it may be impossible if you’ve arranged to move.
Go ahead with the closing, but have the developer put aside money to make the repairs. Your next-best bet is to go ahead with the closing but insist on a written agreement that says the money needed to complete your house will be taken from the purchase price and put into a trust account that the developer can’t touch until the work is done. To protect yourself, add new deadlines to this agreement and state that if the work isn’t done by these deadlines, the money must be returned to you. You can then hire outside contractors to finish the job. Get an attorney’s help drafting an addendum to your agreement.
Make a list of the remaining tasks, assign each a completion date, and insist that the developer sign it before you agree to close. If you can’t get your developer to delay the closing or set up a trust account to finance the repairs, this type of “punch list” may be your only option. Unfortunately, you’ll have to chase down the developer to get the work done.
For an overview of contingencies, see the Nolo article Contingencies to Include in Your House Purchase Contract.