Home Inspection Addendum – Timing is Everything!

In my last blog entry, I talked about 6 key things in any sales contract from the perspective of the buyer.  Here, I’m going to delve into the Home Inspection and Radon Testing Contingency Addendum but am only going to focus on the home inspection component from the buyer’s perspective.  In particular, I’d like to share some tips on how to approach the home inspection and related negotiation period.  I’ll also explore how timing is so critical.

To Inspect or Not To Inspect

When thinking about the Addendum, you need to first ask yourself whether you want to do an inspection.  If you don’t include the Addendum as part of your offer, then you’re telling the seller that you’re comfortable taking the property as-is, waiving your right of inspection.  To inspect or not to inspect is really a question of risk tolerance and how well you know the property and feel confident about what you know.

My advice – unless the market is sizzling hot with properties being snapped up and bid up in a matter of days (or even hours), you should inspect the property.  It’s just not worth the risk of taking on whatever the seller has failed to repair or has repaired poorly.  You need to “get under the hood” of the property before you take it on.  The home inspection contingency is your chance and you shouldn’t squander it, even in the face of marketplace pressures.  Yes, you might lose a property or two to competing offers that don’t opt for an inspection but, in the end, you’ll sleep better at night with the knowledge that you are buying a property that you really know.  There are always going to be surprises but the fewer the better.

Now, let’s talk about some important things to know and consider when completing the Addendum and performing your inspection.

Inspection Period

This is the number of “Days” (and remember to read in the contract how Days is defined) you enter in the Addendum that you have from the “Date of Ratification” (i.e., when both parties have signed the contract) in which to perform the inspection.  Remember, as the buyer, you’re the one to arrange and pay for the inspection.  You have control over this part of the process.  So, you want to be sure to pick the right inspector(s) who can do his/her work in the time you have given yourself under the contract.

Before you decide on the number of days to include for the Inspection Period, you’ll want to pick the inspector you’re going to work with and confirm their schedule and average report turnaround time.  When scheduling, make sure you take into account holidays, weekends and any possible schedule conflicts/delays with the inspector(s).  Also, remember that you’re not obligated to hire a generalist inspector even though that may be easier from a logistical standpoint.  Some actually think it’s advisable to hire separate licensed contractors to perform inspections of specific parts of the house – for example, an electrician for the electrical and mechanical systems, a plumber for all plumbing and water-related systems and a roofer for all gutter, roof and drainage elements of the property.  It’s up to you which approach you want to follow.  Either way, make sure you’ve got the inspector(s) lined up and ready to go in advance of signing the Addendum.

The general rule of thumb is to include somewhere between 7 and 14 days as the Inspection Period.  I actually suggest as few days as possible, within reason, on the Inspection Period so that you can include a greater number of days under the Negotiation Period, as that’s really the period where a lot of the time consuming back and forth occurs between the buyer and seller.  Remember that you want to coordinate well the timing between the Inspection Addendum, the appraisal and any financing contingency; typically, the inspection contingency will have expired before the financing contingency so financing is the last condition before a contract “goes hard” (i.e., no other contractual basis on which to exit the contract).

Once you have the inspection report, you then need to decide what you want to do.  The first question to ask yourself – do you want to proceed with the purchase of the property?  If the answer is no, you can then provide a notice to void the contract so long as it is within the Inspection Period deadline.   If the answer is yes, you have a choice – either accept the property with the deficiencies or provide a copy of the report to the seller with a request that the seller address the issues found in the report.  If you opt for this latter course of action, you enter the zone of the “Negotiation Period.”

Negotiation Period

This is the period during which the buyer and seller engage in discussion about the items on the inspection report that the seller is concerned about.  The Northern Virginia Association of Realtors (NVAR) recommends a Negotiation Period of no less than 7 days. During this period, the buyer and seller will discuss what items on the inspection report the seller is willing or unwilling to fix.  There is no limit on how many offers and counteroffers the two parties can issue during the timeframe allotted but be careful here. You’ll want to make sure to have a “mutually acceptable” written addendum completed by the time stated (9 p.m. on the NVAR form) on the day specified under the Negotiation Period of the Addendum.  You can figure it’s going to take at least 2-3 days per round of discussion to reach some agreement so take that into account when including the total number of days for the Negotiation Period.

Another important consideration during this part of the process is whether you want to allow the seller to opt out of repairing anything in exchange for giving you a credit at closing. In some cases, this may be the preferred path as it gives you control over the repair(s) – you can select the contractor, negotiate the price of the repair(s) and get the direct benefit of any warranties.  The trade-off for this control is that you have to oversee the repairs after closing, just when you may want to move into a house that is move-in ready.  Also, remember that a credit on the closing statement is not the same thing as cash in hand.  Rather, the credit will offset some of your closing costs.

Purchaser’s Election

If the parties cannot reach an agreement at or before the end of the Negotiation Period, the buyer has the option of either (i)voiding the contract by giving written notice to the seller or (ii)going forward with the purchase and agreeing to accept the property in its as-is condition, without any repairs by or credits from the seller.

Again, be careful of timing. If you don’t give your notice to void the contract in the time specified, the contract will remain in “full force and effect” and you’ll have lost your out from the contract.  When putting in the number of days after the Negotiation Period in which you’ll either give notice or the contract will continue on, think about how quickly you’ll be able to give that written notice.  You might want to give yourself a cushion – things can come up to cause a delay – and include 2-3 days (rather than just 1 day after the end of the Negotiation Period).

 

 

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