Should I Waive the Inspection Contingency?

This recent article in the Wall Street Journal discusses a nationwide trend of home buyers waving the right to conduct an inspection. Here at Fennemore we know this trend is affecting buyers in Washington — we speak with people regularly who feel pressure to waive an inspection contingency in order to increase their chances of having their offer accepted. This trend is a byproduct of the strong seller’s market seen in most parts of the country over the past couple of years. 

What is an inspection contingency?

A contingency is a term in a contract that allows one or both parties to cancel the contract under certain conditions. It is historically typical for a home buyer to have an inspection contingency, which would allow the buyer to cancel the purchase and sale agreement — and importantly, get their earnest money back — if they are unsatisfied with the physical condition of the property. Typically, a buyer will hire a licensed home inspector to conduct the inspection. Buyers also sometimes hire specialty inspectors for specific elements of the home, such as the roof, or for rural property, the well and/or septic system.

What are the downsides to waving and inspection contingency?

As the Wall Street Journal article points out, buyers who do not have an inspection before buying a home can find themselves with expensive problems to fix that they didn’t know about. In addition, Washington is a “buyer beware” state, meaning that you have no recourse against a seller for defects in the house or property unless the seller made misrepresentations to you. In other words, you essentially have to be able to prove that the seller lied to you about the problem in order to have any recourse. This is why inspections are so critical for buyers — it is the only way to get information about defects in the property, except to the extent the seller has volunteered information.

Isn’t there a warranty on home sales?

Buyers of resale homes do not get any kind of warranty under Washington law. If you’re the first owner of the home and you buy it from the builder, Washington law provides for a minimum 1-year warranty that the property is free of construction defects — that is, defective workmanship or materials. The buyer of a new home may also get the manufacturer’s warranties on appliances and equipment like furnaces and water heaters. However, it’s not uncommon for a new home to have defects that might not become apparent until more than a year after the sale without a thorough inspection. 

What about buying a home warranty contract? 

A home warranty is a type of insurance that generally covers the appliances and/or major mechanical systems in a home. A home warranty can be somewhat helpful, but be sure you understand the limitations of coverage. There are dollar limits for covered items and there are exclusions from coverage. A dollar limit is a cap on what the company will pay for repairs or replacement of a given system or appliance. Exclusions from coverage are categories of repairs for which the insurer won’t pay anything. Most home warranties cover appliances and systems, like plumbing and heating, up to a set dollar limit. The dollar limit may vary depending on the item being repaired. Most home warranties exclude coverage for things like structural defects and roof leaks, so a lot of big-ticket items are not covered at all. Also, be aware that most home warranties provide for “service fees” which are like deductibles under your car or homeowner’s insurance — you have to pay the service fee off the top and then the insurer pays the remainder.

Isn’t the seller’s disclosure statement a substitute for an inspection?

Most states require some form of seller disclosure for home sales. Washington has a statute requiring delivery of a fairly extensive seller disclosure statement (commonly referred to as Form 17) in most, but not all circumstances. However, receiving the filled out seller disclosure statement is not an adequate substitute for an inspection. The seller disclosure statement only requires the seller to disclose defects that the seller is aware of. If the seller is unaware of a given defect, it will not appear on the disclosure statement. Also, sellers often fill out the form incorrectly, or simply don’t provide enough information. Even when a seller does disclose a defect through the seller disclosure statement, that is generally just a starting point for the buyer to follow up with questions and an inspection to get a full understanding of the issue and any needed repairs. Finally, the delivery of the seller disclosure statement can be waived, and in market conditions under which buyers feel pressured to waive inspection contingencies, they will likely also feel pressured to waive receipt of the seller disclosure statement. 

One upside to the seller disclosure statement in Washington is that the buyer has a right to rescind the purchase agreement and get their earnest money back if they exercise the right within three business days after receiving the seller disclosure statement – even if they otherwise don’t have any contingencies (this assumes the buyer has not waived the right to receive the seller disclosure statement). If the buyer received the seller disclosure statement before signing the purchase agreement, they need to review it carefully before signing the purchase agreement because that three-day period may expire less than three days after the purchase agreement is signed, or even before the purchase agreement is signed. In that scenario, ask any questions raised by the seller disclosure statement before signing the purchase agreement.

So what should buyers do in a strong seller’s market?

I don’t feel like it is my place as an attorney to tell clients not to do real estate deals, so I won’t say never buy a house without an inspection. Instead, I encourage my clients to weigh the risks as best they can and make the decision based on their own comfort level with the risk. In a hot seller’s market, buyers need to think seriously about the risk of unknown defects and the potential costs of repairs if they are going to buy a house without an inspection. At least if buyers expect issues and budget for them, the surprise may be somewhat less unpleasant. The hard part is knowing how much to budget – problems can range from minor, like replacing the dishwasher, to truly major, like structural problems with the foundation. Setting aside a budget to deal with these unknowns means picking an amount that should cover most of the cost of the most likely problems, and may require making a smaller down payment or buying a cheaper house than you otherwise might, so you can keep some cash on hand to make repairs. Most importantly, go into the purchase with your eyes open and be honest with yourself about your mental and financial ability to deal with the increased risk of finding undisclosed problems with the property.