How a 'physical inspection contingency' is being used in all sorts of ways by home buyers

It is common practice when purchasing a single-family home to include a physical-inspection contingency in the purchase agreement.

A contingency is a condition of the purchase. The physical-inspection contingency allows the buyer to thoroughly inspect the property from one end to the other and decide whether to purchase the property based on their due diligence and those inspections.

In a normal market, the intent of this contingency is to determine whether the house meets a buyer's standards and criteria, and the buyer either approves of the inspection or disapproves and withdraws from the purchase, just like you would when inspecting an automobile. But over the years, as homes have increased in value and become very expensive, buyers with big expectations after paying big prices have used the physical-inspection contingencies in many other ways.

A 45-page detailed inspection report is used as a bargaining chip and grounds for negotiation in many cases, to either lower the price, or to get repairs and even upgrades by the seller.

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Unfortunately, or fortunately, many buyers will use a contingency to backpedal on a price they've offered to pay. With the market so heated as it is today, sellers and their representing agents have become very defensive about this, taking advance precaution. "It's not ethical," said a seller I recently represented.

Actually, with a contingency, a buyer can still try to renegotiate. That certainly doesn't mean the seller will or should agree to a price adjustment.

As a precaution lately, many sellers' counteroffers state that the physical inspection shall be on a pass-or-fail basis only and cannot be used as a bargaining chip to renegotiate the price or negotiate repairs.

Nevertheless, it is still very important to include a physical-inspection contingency so that you are going into the transaction with your eyes wide open. Certainly, if you were a buyer, you would not want to buy a property and then find out later that there were significant defects not visually known.

The seller, of course, is under an obligation to reveal and disclose to you everything he knows, but there may be defects that are even unknown to him, and so, if you wish to have a full understanding of the property, relying on a disclosure statement itself is not sufficient.

After you have completed the physical inspection, you still have the choice to ask for repairs or a price credit without risking a loss of the contract.

The seller can simply either negotiate or flatly and outrightly say no, at which point you can step back and make a final decision whether you wish to move forward and purchase the property as is, or withdraw and receive your deposit back.

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You will not lose your deposit if there is a contingency, but once the "notice to perform" has been given to you (that your contingency time period has lapsed), you only have 72 hours at the most, and sometimes less, to make a final decision of either yes or no.

Sellers can be very rigid in this market, especially when they have backup offers and many other options. In many cases, they will not stand for renegotiating, because they know that is something they don't really need to do in this market. When the market changes one day and becomes more of a buyer's market again, a buyer may be in a better position to use this renegotiation tactic as a bargaining chip.

My recommendation to a buyer is to take this inspection very seriously and know what is important and what is not.

Certainly, conditions related to drainage, mold or hillside slippage are significant problems that need to be checked out thoroughly before you move forward.

On the other hand, if this is a property you really like and there are repair issues that can easily be remedied and the seller will not participate, I recommend seriously evaluating your position and still moving forward to purchase the property as is, if you are financially able.

Certainly, if the house needs a new roof, that's an expensive item, but it shouldn't stop you from buying the property if you really wanted it in the first place, assuming that is not a financial dealbreaker. If you just can't afford the investment of a new roof, that would be another story.

The most expensive repairs are related to mold and drainage. Moisture and water penetration can be significant and may need further investigation by mold or drainage specialists.

You can always ask for specific inspections for the roof, plumbing, electrical or heating to determine anticipated repair costs before moving forward. Either way, do inspections thoroughly and understand that we are still in a seller's market.

If the property has been on the market for many months and the seller is highly motivated, you may be in a better position to negotiate a credit or repairs. But today, those are not the more typical cases.

Finally, my suggestion is don't let your ego get in the way.

Ron Wynn has been among the top 100 agents in America for over 10 years, as noted on REAL Trends/Wall Street Journal. Ron has represented over 2,200 sales totaling over $1.5 billion in sales volume in his 30-plus-year career as a real estate broker in California.

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