How to Remove an Inspection Contingency When You Buy a House

Most homebuyers include an inspection contingency in their real estate purchase contract. This gives them the option of hiring professionals to perform one or more property inspections and negotiating over any repair needs that turn up, all by a set deadline before the closing. Also, the contingency typically allows buyers to back out of the deal (within the same time period) if ultimately unsatisfied with what the inspection reports reveal.

Below is an overview of how this typically plays out, including:

• why you might have or want an inspection contingency
• how to follow up on the results of an inspection with repairs or seller payments
• when to get specialized inspections
• how to handle inspections for newly built houses
• how to back out of the deal if you can't resolve inspection-related issues, and
• finally, how to actually, officially, remove the contingency.

You can skip the below discussion of negotiating over repairs and skip to the last section if you included only what's commonly called a "yes/no" inspection contingency in your purchase offer and contract. That means you've specifically promised that your only options are to go ahead with the deal as signed or back out entirely, with no negotiations over repair needs.

Reasons to Include an Inspection Contingency in Your Home Purchase Contract

Most buyers arrange a general inspection of the house's physical and structural components to check out defects in the property, such as a leaky roof or a heating problem. In many parts of the United States, pest inspections are also common. (Institutional lenders often require them.) Also, some buyers bring in specialized inspectors to cover aspects of the property beyond the general inspector's scope of expertise, such as a structural engineer to evaluate a foundation.

Rare is the house that does not have a few hidden flaws or defects that you won't know about until after the inspection. After reviewing the inspector's report, you'll most likely have to decide:

1. whether the problems can be fixed
2. whether you can live with them if they can't be fixed
3. who (you or the seller) should pay for repairs, and
4. what you'll do if you and the seller can't agree on who pays.

Can the Home Defects or Other Problems Be Fixed?

Discuss with the inspector or outside contractors whether the problems can be fixed and if so, how much repairs are likely to cost. A pervasive mold problem, for example, might not be fixable, 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.

Who Will Pay for House Repairs?

Your first inclination might 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.

Options If the Seller Agrees to Pay for Repairs

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 (from the buyer, not the seller). 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 might 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 could raise more problems than it solves. If the repair takes longer than expected, you could bump into your closing date.

Options If the Buyer Will Be Paying for Repairs

There might be situations when you're responsible for the cost of repairs. For instance, maybe you got an especially great deal on the sales price and the seller won't negotiate on repairs. You might 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 can 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.

What If You Need More Specialized Property Inspections?

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 could 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.

How Inspection Contingencies Work With Newly Built Houses

If you're buying a newly constructed 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:

• improper weather detailing around doors or improperly installed siding (causing leaks)
• poorly graded land or faulty sewer connections (causing flooding)
• blocked vents in the kitchen (leading to mold and moisture problems),
• and building code violations, such as ungrounded electrical outlets.

If you discover any defects in your newly built house, you have several options:

Delay the closing. This is your most obvious choice, but it might 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 saying 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 then, 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" might be your only option. Unfortunately, you'll have to chase down the developer to get the work done.

When You Can Back Out of the Real Estate Sale Based on the Inspection

For serious problems that you can't or won't negotiate over, you might want to cancel the sale. This is a simple matter of refusing to remove the inspection contingency by the date given in the contract. Since the seller might not be keeping a close eye on the date, however, your agent will likely want to communicate the fact that you will not be removing this contingency, and wish to cancel the deal. Because this was a possibility contemplated within the purchase contract, the seller should refund you your earnest money deposit.

Removing the Contingency When You Want to Go Forward With the Real Estate Sale

If you receive the inspection report and are either happy with what it showed or have successfully negotiated over repairs with the seller, it's time (assuming the deadline hasn't passed) to remove the contingency. The procedure for doing that depends on state law or custom.

In some states, buyers can just wait for the deadline to pass without them canceling the sale, and it will be assumed that they've removed or waived that contingency. Other states require more active steps, most often buyers having to remove the contingency in writing using a standard form. Your real estate agent and escrow company will know the procedures in your state, and can help you keep track of the deadlines for removing the inspection and other contingencies.