Home Inspection Contingencies Give California Buyers a ‘Way Out’

This article is part of a series that covers the different types of real estate contingencies home buyers can use. Today, we will examine the home inspection contingency used by many California home buyers, along with the pros and cons associated with these contract clauses.

How a Home Inspection Contingency Works

In previous articles, we explored purchase contract contingencies used for home appraisals and mortgage financing. But there’s another common contingency used by home buyers in California, and it relates to the property inspection.

Let’s start with a couple of important definitions.

• Home inspection: A thorough examination of a house conducted by a trained and licensed inspector. Home buyers use these inspections to gain better insight into the true condition of the house they’re purchasing. The inspector will evaluate the roof, foundation, electrical system, HVAC, and more.
• Real estate contingency: A contract clause that stipulates certain conditions and requirements that must be met in order for the deal to proceed. Contingencies give California home buyers a way to back out of the deal if certain conditions arise, while protecting their earnest money deposit at the same time.

Put these two concepts together, and you have a home inspection contingency.

An Example Home Inspection Contingency

In California, home inspection contingency clauses can vary slightly from one real estate contract to the next. There’s more than one way to phrase them. But rather than focusing on the exact wording, home buyers should ensure that the clause includes several key elements.

Let’s look at an example home inspection, before breaking down those key elements:

This offer is contingent upon the buyer’s satisfaction with the results of a professional home inspection, to be conducted within 17 days after the acceptance of this contract. The buyer shall have the right to hire a qualified inspector to evaluate the property’s condition. If the inspection report reveals any material defects or issues that the buyer deems unacceptable, the buyer may, at their sole discretion, either request repairs, renegotiate the purchase price, or terminate the contract. In the event the buyer elects to terminate, the earnest money deposit shall be refunded in full to the buyer.

Breaking Down the Key Elements

When adding a home inspection contingency to your contract, you can adjust the wording as needed to meet your specific needs. The most important thing is to include the necessary elements.

The example contingency above includes the following components:

• Right to hire an inspector: As the clause states, the home buyer has the right to hire a qualified inspector to examine the property. This allows the buyer to assess the true condition of the home based on a professional assessment.
• Timeframe for the inspection: This particular clause allows the home buyer to schedule and complete a home inspection within 17 days of the offer being accepted, which is fairly standard in California. But the timeframe can be shortened or extended as needed.
• Options for the buyer: This contract contingency gives the buyer several options in the event that the inspection reveals material defects. The buyer can (A) ask the seller to make repairs, (B) renegotiate the purchase price, or (C) terminate the contract and walk away.
• Recovering the deposit: The last sentence of this example clause contains the most important details. It allows the home buyer to recover their earnest money deposit if the inspection reveals serious issues that they are not comfortable taking on.

Two Different Scenarios: Buyers Backing out

In an expensive real estate market like California, a typical earnest money deposit can add up to thousands of dollars. If a home buyer were to back out of a deal without just cause, they could risk losing that money. Contract contingencies can help prevent such losses.

Here are two realistic scenarios that illustrate this distinction:

Scenario 1: Buyer includes an inspection contingency

In this example, the home buyers have included an inspection contingency within their real estate contract or purchase agreement. The contingency states that the buyers have the right to cancel the transaction and back out, if the home inspector discovers something that they are not willing to accept.

The inspector identifies a serious issue with the home’s foundation, which could bring expensive repair costs down the road. The buyers decide they are not willing to take on this risk, so they cancel the deal. The home inspection contingency allows them to do this while also recovering their earnest money deposit.

Scenario 2: Buyer chooses to waive the contingency

In this example, the home buyers have decided to waive all of their purchase contract contingencies in order to get their offer accepted. They are in a highly competitive real estate market where sellers typically receive multiple offers. So they’ve chosen not to use a home inspection contingency, to give them an advantage over other offers.

Here again, the inspector identifies a serious issue with the house’s foundation. But the buyers do not have an inspection contingency in place. So they essentially have three options:

• They can back out of the deal and potentially lose their earnest money deposit.
• They can ask the seller to repair the foundation, which the seller might refuse.
• Or they can move forward with the purchase and deal with the foundation issues later.

Pros and Cons of Contract Contingencies

The scenarios presented above demonstrate the potential pros and cons of using a home inspection contingency within the California real estate market. As a home buyer, you should consider the following advantages and disadvantages before using such a contingency.

Pro: It protects your deposit and gives you more flexibility.

The home inspection contingency gives buyers more flexibility when it comes to contract negotiations. It basically creates an exit strategy for certain situations relating to the inspection. Most importantly, this and other types of contingencies allow buyers to exit the transaction while retaining their earnest money deposit.

Cons: It could make your offer less attractive to the seller.

There is also a potential downside to using a home inspection contingency in California, especially in a competitive real estate market. The primary disadvantage is that this strategy could make an offer less appealing to the seller.

Real estate contingencies can also make the transaction more complicated, from the seller’s point of view. This could work against the buyer in a competitive market, where multiple offers are common.

If a seller has several offers lined up, they might choose the one with the fewest strings attached. An offer that includes multiple contingencies and asks for seller concessions might be disregarded in favor of a “cleaner” offer. This is a common occurrence within the California real estate market.

Ultimately, the choice is yours to make. The key is to make an informed choice with careful forethought and planning. As a home buyer, you should never sign a purchase agreement until you’re comfortable with the language it contains.

5 Key Takeaways From This Guide

Here are the five most important points you should take away from this guide:

• In California, a home inspection contingency allows buyers to back out of a deal if the inspection reveals serious issues.
• Real estate contingencies can protect the buyer’s earnest money, if they decide to exit the deal for a reason stated in the contract.
• Inspection contingencies give buyers options. They can request repairs, renegotiate the price, or walk away after the deal.
• Without an inspection contingency, home buyers risk losing their deposit money if they back out.
• Keep in mind that contingencies might make your offer less appealing in a competitive real estate market.

Disclaimer: This article provides a basic overview of home inspection contingencies in California. Real estate transactions can vary due to a wide number of factors. So portions of this article might not apply to your particular situation. This article is not meant to take the place of professional legal or real estate advice.