The Inspection Contingency is by far the scariest, most confusing and frustrating part of any contract for sale.
Section 12 of the Maryland Residential Contract for Sale provides that a buyer shall be afforded the opportunity, at Buyer’s sole cost and expense, to condition Buyer’s purchase of the property upon a Home Inspection in order to ascertain the physical condition of the Property. In order for Buyer to activate this contingency, he or she must include the proper addendum to the Contract. In Maryland, this is called the Property Inspections Addendum. This form, as propagated by the Maryland Association of Realtors, sets forth the type of inspections that may be requested, provides timelines for providing inspection reports, and defines Buyer’s right to terminate the contract under certain conditions.
To be clear, this is an incredibly important document. Unless I’m working with a highly sophisticated investor, I can’t imagine submitting an offer to buy a house without the inspection contingency. However, this is an incredibly flawed process that inherently creates conflict. If you aren’t cautious, you might just blow up a great deal for you and your family.
What is the function of the inspection contingency?
The inspection contingency is meant to be a safety net for good-faith Buyers. Most Buyers have only seen the house during a brief visit. During that time, they can observe certain obvious defects, and they can craft an offer for purchase taking those defects into account. However, an experienced, licensed inspector can identify any number of problems that most Buyers couldn’t possibly find on their own. What if there is structural damage to the roof, or cracks in the foundation? The inspector may find leaky pipes, faulty wiring, and you can also test for things like peeling lead paint or disturbed asbestos. These are significant issues, which were not reasonably discoverable without an inspection, which impact the value of the house.
However, this contingency is routinely abused and misused, leading to all kinds of drama, hurt feelings and wasted money. In large part, I blame the actual contractual language for this. As written in the Property Inspections Addendum, the purpose of the inspection “is to discover unsatisfactory conditions, if any, of the components and systems of the Property….” As a lawyer, I am extremely frustrated by this language. What the heck constitutes an “unsatisfactory condition”?? And who decides if it is unsatisfactory?
This sets up for some frustrating situations. Say there is a perfectly lovely house for sale, but the carpets look like crap. The Buyers know the carpets look like crap, and the house is priced accordingly. Sure enough, the Property Inspection flags the carpet as a potential tripping hazard and recommends non-urgent repair or replacement. Does this mean the Buyer can request the Seller to replace the carpets, and threaten to back out of the deal if the Seller refuses?
I believe the answer ought to be NO. This condition was readily observable when the Buyers visited the home, and they already accounted for this when making their offer for purchase. I don’t believe it’s proper for the Buyers to use this contingency as leverage to squeeze this additional concession out of the Seller. There is also language tucked in the contracts to discourage this behavior. In the Property Inspections Notice, where the Buyer informs the Seller of any unsatisfactory conditions, it states that (in bold font) “The inspections provided herein are NOT for the purpose of making items of a routine maintenance and/or cosmetic nature the subject of further negotiations between Buyer and Seller.” So, damaged carpets, even if flagged by the Property Inspection, should be considered a cosmetic condition and should not be grounds to back out of the deal.
For the Buyer: What’s the harm in making excessive repair requests?
Why not just ask the Sellers to repair every single item that is flagged on the Inspection Report? The worst they can say is “No,” right? Parties need to remember that we are dealing with human beings on the other side. If the the Seller looks at an unreasonable list of repairs, they are likely to provide an unreasonable response. Agitated Sellers may throw up their hands – refusing to perform any repairs, and try from that point forward to cancel the contract. Remember, the inspection process comes after the price has already been negotiated (often contentiously), and the property has been taken off the market. Psychologically, the house is already sold, and the hard part is over. So, when Sellers are presented with a laundry list of cosmetic fixes and other improper “upgrade” requests, Sellers frankly perceive this as an act of war.
For the Seller: Should they just say no to any repair request they don’t like?
Sellers will often have a strong reaction when they see a repair request that they consider unreasonable. To be sure, the Seller can say “no” to whatever they want, but should be informed and calculated when crafting a response to a repair request. In the real world, the leverage provided by the inspection contingency does favor the Buyer. Notably, the Seller is at a disadvantage because the property has been removed from the market. So, if there is a stalemate on the inspection and the contract is voided, the Seller must put the property back on the market, host new showings, and negotiate a new purchase price and closing date. This all takes time, and this delay likely means that the Seller will have to make an additional mortgage payment while this process unfolds. So, while the Sellers are entitled to play hardball with the repair requests, Sellers need to calculate the risk of incurring an additional mortgage payment if they want to refuse repairs and start over. This is a delicate process, and it pays to have a savvy negotiator on your side.
This Sounds Terrible! How do transactions ever get to closing!?
You need to have a system in place, manage expectations, and communicate effectively. Not all Realtors are sophisticated professionals. Often, it comes down to educating on the other side. Regardless of whether I am representing Buyers or Sellers, I will remind the other side of the purpose of the Inspection Contingency, and make reasonable expectations clear on behalf of my client. Outwardly, the goal is to remove emotion from the transaction. At every step, my client will come off as professional, reasonable, and consistent. If the other side refuses to act reasonably, then it’s time for a hard conversation. As a team, we will work together to decide what concessions are appropriate (if any) in order to achieve my client’s goals.