With the extremely competitive nature of the real estate market today, many buyers are finding themselves with a dilemma: waive their inspection contingency or risk not winning the house.
What is an Inspection Contingency?
When a buyer finds a home they like, they make an offer on it at a price they find fair. Within this offer, they specify a few things that would prevent them from following through with the purchase: contingencies.
If the contingencies are not met, the buyer's offer is rescinded. This gives buyers time to ensure the appraisal meets their expectations, they qualify for a mortgage, and the home inspection does not indicate any major issues.
Waiving the inspection contingency means that buyers cannot back out of the sale no matter what condition the home is in. This exposes the buyer to a lot of risk.
Giving the buyer leverage.
Waiving your inspection contingency is extremely risky. A recent survey found that 86% of home inspections find something that needs to be repaired or replaced. That leaves fewer than 1 in 5 homes that were in optimal condition.
Additionally, they found that buyers were able to decrease the price of the home 46% of the time after the inspection. On average, home inspections save buyers $14,000 (based on the difference between initial offer and closing price).
Data from a study conducted by Porch
The current state of the market
Historically low interest rates caused by the pandemic, alongside a host of other factors, have created an extremely hot real estate market. 59% of homes are sold in under two weeks, with multiple offers present on every listing. Sellers are undeniably in control.
In some large cities (Denver, Seattle, Austin, and more) listings are receiving 20 or more offers. There is high demand and minimal supply, driving up competition and home prices.
Home prices have also risen by 17% year over year. The sales price to listing price ratio was 100.1% as of March 2021, meaning that the average sale price is above the listing price. There is extremely stiff competition across the country. Buyers, desperate to win a listing, are looking for ways to increase the quality of their offers.
There are a few common ways that buyers are making better offers. They have already increased their price, but that is not enough in some real estate markets. Another option that many buyers are taking is eliminating contingencies. However, this opens them up to risk.
Data from a study conducted by Redfin.
Without an inspection contingency, buyers lose their negotiating power with the sellers. Sellers typically extend a credit, accept a lower asking price, or repair the issues themselves before the transaction closes when the inspection discovers problems. Without the inspection contingency, the buyers bear the full burden of any needed repairs.
Is it worth it?
Is it worth it to waive your inspection contingency? It depends on the buyers and how much they want the home. If buyers have their heart set on a home and are prepared to pay for repairs, it could be worthwhile.
However, if they are already pushing their budget, they could be exposing themselves to risks they cannot afford. It is up to buyers to determine what their risk tolerance is and how much they like the property.
There are also factors that can mitigate their risk. Newer properties are unlikely to have issues with major appliances or structural components. A home warranty can be purchased to cover items that need repairs. Buyers can also bring inspectors with them during showings to get a surface level inspection before making an offer.
Always get an inspection
Even if buyers waive their inspection contingency, they should still get an inspection done. The goal of a post-close inspection is not to save money, but to learn what repairs are needed. Uncovering major issues (termites, cracked support beams, water damage, mold, etc.) helps you save money down the road by addressing the damage before it gets worse.
Buyers who agree to waive their inspection contingency accept the home in its current state, but they still need to know what that state is. Additionally, certain types of issues can allow buyers to back out of the agreement, even without the contingency. For example, toxic mold in the home gives buyers legal ground to cancel the contract.
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