The Inspection Contingency Returns ... But Sometimes with a Twist!


 Jennifer Lindsley, WRA attorney and director of training  |    September 06, 2022
Inspection Contingency

With some parts of the state experiencing a slightly less competitive real estate market, some buyers are again considering the value of including an inspection contingency in their offers. Not all buyers and sellers, though, are going “all in” on the preprinted terms of the inspection contingency as found in the WB offers to purchase. Instead, some buyers and sellers are adding additional details, such as tolerances for some defects up to a certain dollar amount or identifying specific defects for which the buyer will not issue a notice of defects. 

The original, unmodified, preprinted inspection contingency

Even under the preprinted terms of the inspection contingency in the WB offers to purchase, a buyer always had the option of choosing to tolerate defects up to a certain amount or tolerating defects of a certain type by negotiating with the seller using amendments, not issuing a notice of defects at all, or issuing a notice of defects for only certain items for which the costs of repairs would exceed what the buyer is willing to absorb. 

For example, a buyer’s offer included the preprinted inspection contingency in the WB-11 Residential Offer to Purchase with no additional language about not objecting to defects below a certain dollar amount or not objecting to an identified defect. The buyer’s home inspection notes that stairs leading down from the back porch are not installed correctly, and the inspector recommends they be repaired. This particular buyer did not give the seller the right to cure in the inspection contingency, and the buyer plans to replace the entire back porch shortly after closing anyway. The buyer could propose an amendment asking for a repair or a credit, acknowledging that the seller does not have to agree to the amendment. Given the buyer’s plan to replace the back porch, this buyer might just accept the property in its current condition and issue neither an amendment nor a notice of defects. Because the buyer did not give the seller a right to cure, issuing a notice of defects would make the offer null and void, and if the buyer can live with the faulty steps for now, the buyer probably does not want that result and will refrain from issuing the notice of defects. Even if the seller did have the right to cure, a seller is never obligated to cure and could choose not to cure if the buyer issued a notice of defects, and that too would make the offer null and void. 

If the defects were more consequential to this buyer and amounted to a defect or defects beyond the issue with the back porch stairs, the buyer could still try to negotiate using amendments or issue a notice of defects and trigger the seller’s right to cure if the seller had a right to cure.

Inspection contingency with a twist: dollar limit

Including an inspection contingency where the buyer agrees not to issue a notice of defects unless the estimated cost to repair the defects exceeds an agreed upon amount can be a compromise between the “all or nothing” method when parties are negotiating whether the buyer can have an inspection contingency in the buyer’s offer. A buyer may be willing to accept defects up to a certain dollar amount with the understanding that the buyer will address those defects after closing. As for the dollar amount that a buyer is willing to accept, that number is completely negotiable between the parties. It could be $1,000, $5,000, $10,000 or any other amount on which the parties agree. The key to this negotiation strategy is carefully drafting the language regarding the dollar amount of defects that the buyer is willing to accept. Will the buyer obtain the estimates for repairs? Will the seller obtain the estimates for repairs? Will each party obtain an estimate and find the average of the two estimates? All of these are acceptable options, but the parties want to make sure they agree on this ahead of time. 

Another consideration if the parties are using this strategy is to make sure there is enough time under the inspection contingency deadline for the parties to obtain an estimate or estimates regarding the expense to fix the defects. Thinking about how much has to occur by the deadline for the inspection contingency, the parties will want to be mindful of the extra step involved in obtaining estimates for repairing the defects. During the period for the inspection contingency, the buyer needs to have the inspection; have inspections of any components listed in the inspection contingency such as a roof, swimming pool or chimney; and have any follow-up inspections recommended in writing in any inspection report. If the buyer has agreed not to object to defects below a certain dollar amount, the buyer will need to keep an eye on the deadline for the inspection contingency to make sure the buyer obtains the estimates for the repairs before the deadline for the inspection contingency. One possible safeguard would be for the parties to negotiate an automatic extension to the deadline for the inspection contingency if the parties are experiencing a delay in obtaining any necessary estimates regarding repairs. This, of course, would have to have been negotiated into the offer as there is not an automatic extension of any deadline in the offer. 

The parties will also want to consider what happens if the estimate for the repairs exceeds the dollar amount the buyer and seller agreed to in the offer to purchase. Say the buyer agrees not to issue a notice of defects if the estimate for the repairs does not exceed $5,000. The buyer has the inspection, the inspector finds several defects, and the buyer obtains estimates for the repairs as agreed to in the offer. The estimates for the repairs total $10,000. Now what? As always, the parties can try to negotiate a resolution using amendments. Maybe the buyer proposes an amendment asking for the seller to repair named defects where the estimate for the repairs is roughly $5,000, and the buyer is still willing to absorb the expense for the remaining $5,000 worth of defects. The buyer could, of course, propose an amendment asking for all $10,000 worth of defects to be repaired or some other number. If the parties agree to resolve this using an amendment or amendments as necessary, the transaction keeps going and the buyer never has to issue a notice of defects. 

What if the parties are unable to resolve this issue using amendments? Then the buyer must decide whether to issue a notice of defects objecting to the defects per the terms of the offer to purchase. If the buyer issues a notice of defects and the seller does not have the right to cure, the offer is null and void. But what if the seller does have the right to cure and the buyer issues a notice of defects — which would presumably be accompanied not only by the inspection report but also the estimates for repairs — showing the cost to repair the defects exceeds the $5,000 threshold the parties agreed to in the offer? Is the seller now obligated to cure all $10,000 of the defects, or just some of the defects where the total estimate of repairs is equal to the $5,000 that exceeds the buyer’s $5,000 threshold? If the seller has to repair just some of the defects, how does the seller pick which defects to cure? Remembering, of course, that the buyer cannot use a notice of defects to dictate which defects the seller must cure or how the defects will be cured. To avoid this murky scenario, parties using this method of negotiating the inspection contingency will need to specify in the original offer how this is addressed. The offer should clearly state what happens if the estimates to repair the defects exceed the buyer’s threshold and the buyer issues a notice of defects when the seller has the right to cure. If the offer specified that if the buyer issues a notice of defects because the amount exceeded the threshold agreed to in the offer to purchase, and the seller is electing to cure, then the seller must cure all the defects, the parties have their answer, and the next steps are clear. If the parties agree the seller only has to cure defects above the buyer’s threshold of $5,000, which in this example would mean the seller is going to cure $5,000 worth of defects, the parties will want to specify who gets to pick which defects the seller cures. 

Inspection contingency with a twist: specified defects

Another iteration of the inspection contingency but with a twist that has been circulating is language included in the buyer’s offer where the buyer agrees not to object to certain defects. Maybe the buyer is looking at a property where it looks like the boiler and the roof are a little older. The buyer is completely willing to take the buyer’s chances on the existing boiler and roof and use them as long as they last but has budgeted to replace them in the near future. The buyer might however not be willing to live with defects in the electrical system or the septic system or other defects. The buyer could draft the buyer’s offer to specify that the buyer will not issue a notice of defects regardless of what defects the inspector finds in relation to the boiler and the roof, but the buyer reserves the right to object to any other defects revealed in the inspection. 

An agent working with a buyer who is willing to waive the buyer’s right to object to certain defects should definitely caution a buyer though that a condition may be worse than expected and could be a bigger issue later than the buyer anticipated. Consider the previous example where a buyer can visibly see that the seller’s boiler and roof are on the older side so the buyer drafts an offer stating the buyer will not issue a notice of defects regarding the boiler and roof. The transaction closes and some months later, the buyer decides it is time to replace the roof. When the buyer’s roofer comes to provide an estimate, it is discovered that not only was the roof old, but it was leaking slightly into the attic, damaging insulation and allowing for mold to start growing. The areas where the roof was leaking were obscured because the attic was partially finished and thus the buyer’s home inspector could not see evidence of the water intrusion. These additional issues will increase the expense of repairing the roof. 

What is the takeaway? 

Including an inspection contingency is the best way to protect a buyer in a real estate transaction. Additionally, a buyer should be encouraged to consider contingencies such as well water testing, well inspection, septic inspection, radon testing and others as applicable. If a buyer is competing with other buyers though, the buyer may want to customize their inspection contingency by either agreeing not to object to defects below a certain amount or not to object to defects regarding specific items or conditions. Using the inspection contingency in this way allows buyers and sellers to move away from the risky move of not including an inspection contingency at all. In many ways, the buyer having a clear understanding of the condition of the property is in the best interest of both the seller and the buyer. Using these variations on the inspection contingency allows a buyer to discover potential issues to the property and decide an expense related to defects or specified defects the buyer can live with. It also benefits the seller by hopefully reducing the possibility of a post-closing lawsuit when the buyer discovers something after closing that could have been revealed had the buyer had an inspection. If an agent is working with a buyer who wants to use the inspection contingency with a twist, careful drafting is key to make sure the process goes smoothly, and both the seller and buyer know what to expect in the process. 

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