Problems in Real Estate Business
Strange things happen in hot real estate markets, and some of these things can be detrimental to sellers, buyers and the whole real estate experience. One such hot-market phenomenon is that some buyers decide to not make a professional inspection a contingency of their offer to purchase a home. Waiving the inspection contingency may help them prevail in a multiple offer situation, but it can prove foolish.
Fred Friedland, a realtor with the St. Francis Wood office of Prudential California Realty in San Francisco — one of the nation’s hot real estate markets — says he has seen three all-cash, no-inspection offers in recent months. “I would never advise a buyer to not have inspections, but it seems it’s being done,” he says. “And they’re the ones who are getting the property.” Sellers naturally favor offers that don’t contain an inspection contingency because it’s tantamount to selling their home as-is. Regardless of the home’s condition, the buyers can’t insist on the seller making any repairs that aren’t otherwise provided for in the purchase contract.
Of course, the buyers may not have much leverage in a hot market anyway because the seller may be holding formal back-up offers and other eager buyers may be waiting in the wings. Nonetheless, the risks to the buyer of not having a professional inspection as a contingency are considerable. “The buyers face a huge risk in terms of buying a property with an unforeseen defect,” warns Friedland.
He recalls one instance when an inspector discovered that a home had been built on a sewer easement. “The value of the property went to zero,” he says. Friedland recalls another case in which the sellers of a 1897 Victorian home provided a pest control report showing the property needed $2,400 in mitigation work. The buyers hired a home inspector who happened to be a licensed pest control expert as well. He noticed some additional termite damage that would cost thousands of dollars more to repair. In fact, the home was being eaten alive from the ground up. “The sellers were trying to minimize the appearance of how much damage there was,” Friedland believes.
While these are extreme cases, buyers who waive the inspection contingency have no protection from a host of lesser, yet still costly potential defects in a home. A leaking roof, faulty electrical wiring, malfunctioning major appliances, a defective heating or cooling system and many other problems can result in thousands of dollars of unexpected repair costs at a time when most buyers are strapped for cash.
Waiving the inspection contingency doesn’t mean the buyers are buying blind. They can see much for themselves, and Friedland mentions that a buyer who is a general contractor probably can assess a property without an inspector’s report. Also, some state disclosure laws force sellers to reveal any material problems of which they are aware. However, many sellers are blissfully ignorant of serious defects in their home, and they naturally can’t disclose what they don’t know.
Finally, a buyer’s purchase offer might contain a right to have a professional inspection even though approval of the inspection report won’t be a contingency of closing the transaction. If the inspector uncovers substantial problems, the buyers can attempt to find another way to cancel the escrow.
The bottom line is that waiving the inspection contingency is rarely worth the risk, particularly because it doesn’t ensure a price discount in a strong market. Friedland says well-informed buyers much prefer to move on to another home rather than pass on the inspection. “They’ve always felt they would rather not get the property if they wouldn’t be allowed to have the inspection,” he says.