When buy a house. most buyers are given a certain amount of time to complete a home inspection. Most people complete some type of inspection when purchasing a home, but is a home inspection always necessary? I have been a Realtor since 2001 and I am also a real estate investor. In my opinion 95 percent of house buyers should always get a home inspection. There are a few cases when a home inspection is not needed and some cases when not getting a home inspection will actually give you a better chance at getting a great deal on a house.
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How does a home inspection work when buying a house?
When buying a home, most buyers are given a chance to get an inspection done on the house before they buy the home. In most states it is typical for the inspection to occur right after the home goes under contract. Buyers are given a specific amount of time to either inspect the house themselves, have a friend inspect it, a contractor or a professional home inspector check out the home.
Buyers should be allowed to check out everything in a home including the major systems, utilities and minor cosmetic issues. In some cases like with HUD homes or some REO sellers the utilities can not all be turned on. If the pipes on a HUD home do not hold pressure when HUD inspects a house, the buyer will not be allowed to turn on the water for inspections or appraisals (will discuss HUD rules later in the article). In some cases, houses that are in really bad shape may not have the electric or gas turned on if it is not safe to do so. The buyers are usually responsible for ordering and paying for the home inspection and it gives them a chance to ensure the house is in satisfactory condition before they buy the home.
How much does a home inspection cost?
The cost for a home inspection can vary greatly. Smaller houses are cheaper to inspect and larger houses are more expensive. Costs vary depending on the region of the country you are in and living costs. Different inspectors have different rates as well.
For a rental property I would buy that is about 2,000 square feet total I can get an inspection done for about $300. On my personal house which is close to 6,000 square feet the inspection was $600 and the inspector did not even get a chance to look at everything in the home (after 5 hours). I am able to get slightly lower rates because I am a Realtor and there is a chance I might send business to inspectors. As a regular buyer expect to pay a little more than I do.
Besides using an inspector you can also use a contractor to look at home for you. I would be cautious when using contractors, because they might tend to under-estimate the seriousness of some repairs. If they convince you not to buy a home and they know you will use them to fix it up, they just cost themselves a job. I had a local roofing Milwaukee contractor look at a flip for me last year where there were major structural problems in the roof. He said it looked like an easy fix and not to worry about it. After he got started on the job, the easy fix turned into almost a complete rebuild of the roof!
What happens to earnest money if a contract is cancelled due to a home inspection?
When you write a contract to buy a home or your real estate agent writes a contract for you, you usually include earnest money. A typical amount for earnest money is one percent of the purchase price, but it can vary depending on your location and the seller. The earnest money is a good faith deposit showing the buyer is serious about buying the home. However, that does not mean the earnest money is non refundable if the buyer backs out.
Most contracts are written so that the buyer can cancel the contract and get their earnest money back if certain things happen. If it a buyer has an inspection contingency written into the contract, they have a certain amount of time to complete an inspection. If the buyers cancel their contract because of the inspection and they notify the seller before their inspection contingency expires, they will receive their earnest money back most of the time (HUD is an exception I will go into more detail later).
If a buyer is not able to get a loan, there is a title problem or another contingency allows the buyers to cancel (title, appraisal, survey, etc.), they can cancel the contract and get their earnest money back as well. You just have to make sure the seller is notified before the dates on the contract expire for those contingencies. It is actually pretty rare that a buyer will lose their earnest money, unless their agent misses a date or the buyers decide to cancel the contract very late in the process after their contingencies have passed.
Does a contract automatically get cancelled after a failed home inspection?
If you find major problems after a home inspection you do not automatically lose the house. There are many options for the seller and buyer to save the deal. The outcome will depend on how serious the problems are with the house and how motivated the sellers and buyers are.
The buyer has the opportunity to ask the seller to make repairs, to ask the seller to renegotiate the contract terms or to cancel the contract. Here are a few ways home inspection issues can be resolved.
- Buyer agrees to purchase the home as-is. In some cases the buyer will decide to proceed with the purchase of a home, even if there are major problems. In some cases the buyer will have no choice because the seller will not make repairs or change the contract (HUD).
- Seller agrees to make repairs to a home. Many times a seller will agree to make repairs to a house after an inspection is done. The seller may agree to make all the repairs the buyer asks for or negotiate to make some of the repairs.
- Seller agrees to lower the price or renegotiate other terms. The buyer may ask the seller to lower the price, or the seller may offer to lower the price after the buyer requests repairs to be made. The seller can also agree to lower the price and make some repairs.
The buyers can ask the seller to repair whatever they want or lower the price to whatever they want, but the seller does not have to agree to anything. If the seller and buyer cannot come to an agreement on what to fix or how much to renegotiate, then the contract will fail.
Why would a buyer not want a home inspection?
In most circumstances it makes sense to get an inspection done. Most home buyers do not have the expertise to know what problems they may encounter when buying a house. A professional contractor or inspector can discover what problems a house has and how serious they are. A home inspection also gives a buyer the chance to ask for repairs or renegotiate the contract. I recommend almost all buyers get a home inspection done.
Having said that, I have not gotten an inspection or asked for an inspection contingency in a contract on the last ten houses I have bought. When you waive your inspection contingency it makes your offer much more attractive to the seller and gives you a better chance to get your offer accepted. This is a great tactic to use in a very competitive market when there are few deals to be had. It is also a great tactic to use in a multiple offer situation.
Do not waive a home inspection if you are not very experienced in buying homes, knowing what repairs are possible to come up and how much they will cost!
Why do I feel comfortable buying houses without an inspection?
I have been a Realtor since 2001, I have 13 rental properties and have flipped over 100 houses. I have a lot of experience with repairs on properties and what to look for. I even repaired a flip myself back a few years ago, which did not go as planned, but sure taught me a lot! There are many things that can cause a lot of problems on houses and you have to know what to look out for.
- HVAC (heating and cooling)
- Wood rot
These are just some of the things you must be aware of and know what to look for if there is a serious problem. These issues do not include cosmetic items or things you can see are wrong like:
Not only do you have to be able to see when there is a problem, you have to know how much it will cost to repair these items if there is a problem. When I buy flips or rental properties I am buying them at a huge discount. When I make my cost estimates for repairs on a home, I always budget in extra money for things I may miss or discover during the rehab. I never assume a house only needs the work I can see, which is another reason I feel comfortable buying houses without an inspection.
Why are HUD inspections different from traditional sale inspections?
HUD homes and some REO sales have much different guidelines than traditional sales. HUD homes are government-owned foreclosures and you can find much more information on them here. For owner occupants HUD allows the buyer a 15 day inspection period. The buyer must pay for the utilities to be turned on for the inspection and in some cases HUD will not allow the water to be turned on. HUD has all of their homes pre-inspected and they do a pressure test on the plumbing system. If the plumbing system does not hold water, HUD will not allow the water to be turned on for the inspection or appraisal.
The inspection HUD does before they list a home provides some information to a buyer, but many times the utilities are not on when that inspection is done. I would never rely on the HUD inspection only; I would get my own inspection on HUD homes as well (if I were a normal buyer). HUD publishes the findings of that inspection (it is called the PCR) on hudhomestore.com under addendums. This is important to know, because if HUD lists something that needs repaired on the PCR the buyer cannot use that as a reason to get their earnest money back. If the buyer of a HUD home finds an inspection problem and they want to cancel it has to be a new problem that HUD did not find.
HUD will also not make any repairs or lower the price based on the inspection and investors are treated differently than owner occupants. An investor will not get their earnest money back due to inspection problems period on a HUD home.
Is it safe to waive an inspection if a home is pre-inspected?
HUD homes have an inspection done before they are listed. I have already talked about why you should not trust a HUD inspection and you should have your own done. Some traditional listings will advertise they are pre-inspected. I think it is a good sign that a home is pre-inspected, but again it is best to get your own inspection done. Inspections are relatively cheap compared to the cost of the problems they might find. Even if a house is pre-inspected I would have your own inspection done to confirm nothing was missed.
Is it wise to use an inspection contingency as a negotiating tool?
If you find major problems with a house that you did not know about, it makes sense to ask for repairs to be done or the price to be reduced. Some buyers will use make an offer with the intention of asking for a price reduction from the inspection results, no matter how the inspection turns out. I never do this and I find it to be dishonest and unethical. For investors who buy many houses, it can also hurt your chances to get a great deal.
I have seen a few deals fall apart because buyers tried to use this tactic and it made the sellers and real estate agents very unhappy. When investors buy a lot of homes they will make offers to the same agents over and over again. I am a HUD and REO listing broker and list many houses. If I see a buyer who always asks for ridiculous inspections items or price reductions I will let my seller know before they accept their offer. If a buyer or real estate agent gets a reputation for renegotiating every offer on inspections, it will make it harder for them to get offers accepted.
One reason I am able to get so many deals from the MLS, is other agents know I do not play games, I do not renegotiate and if I say I will close, I will close.
How to find a great home inspector
When you use a real estate agent they should have suggestions for inspectors in your area. There are also inspectors you can find online, but I would use the recommendation of a professional in the business. There are many home inspectors and in some states they need no training or licenses to be a home inspector.
I would interview any inspector before you use them and make sure you are comfortable with their knowledge and services. Some inspectors will nit pick a house over minor issues and some inspectors will not be very thorough and could miss major issues. I would use what your inspector tells you and ask your agent what they think of the report to decide how serious any problems they find in a house are. Remember, if you are not buying a brand new house, it will have some issues and expect it to have some problems.
Home inspections are very important to most buyers who are not buying a lot of houses. Even if you buy a lot of homes, you have to be very comfortable judging repair costs and what will need to be repaired if you are thinking of waiving your inspection. If you do waive your inspection, you can get out of a contract, but may lose your earnest money in the process. My advice to most is to always get an inspection done.