Methods and contingencies: What happens if inspections reveal defects?

By: Dian Hymer

May 30, 2000

Most home purchase contracts include an inspection contingency so the buyers can inspect the property. Home inspections often reveal defects that weren't apparent at the time the buyers agreed to buy the property. So, at some point during the course of most purchase transactions, the buyers and sellers must decide how to deal with these defects.

Not all inspection contingencies are the same. Some give the buyers the absolute right to withdraw from the purchase contract without penalty if they aren't satisfied with inspections. However, most inspection contingencies give the sellers the opportunity to correct defects. In this case, the buyers can withdraw and have their deposit money returned only if the sellers are unwilling or unable to comply with the buyers' requests for repairs.

In most cases, it's advisable to attempt to reconcile inspection issues rather than simply walk away from the transaction -- even if the contract permits this. Finding another home to buy may be time-consuming. So, unless the defects are very serious, or incurable, try to work out a satisfactory resolution.

FIRST-TIME TIP: The first step to reaching a resolution is to review your home inspection report carefully. Make a list of the defects that need correcting. Then prioritize the list and place the items that need immediate attention at the top of the list.

The next step is to find out how much it will cost to repair the defects that need immediate attention. This usually involves having contractors visit the property to give you bids for repairs. Once you have a grasp of how much it will cost to correct the defects, you can decide how much, if any, of the repair work you'll ask the sellers to take care of.

Several factors will determine how successful you'll be in negotiating with the sellers to pay for repairs. In a hot seller's market, you may have little success, especially if there is a backup buyer waiting in the wings for your deal to fall apart.

However, if the defects are serious, it's likely that most buyers will want them corrected. And most states, like California, have disclosure laws. So if your deal falls apart, the sellers may have to reveal the negative findings of your inspections to subsequent buyers.

Negotiating on inspection defects can be similar to the initial purchase negotiation. Often buyers and sellers make counter proposals to one another until a mutually satisfactory agreement can be reached.

Sharing in the cost of repairs is one way to reach a resolution. For example, buyers recently discovered that the roof of the home they were buying was near the end of its useful life. The cost to replace the roof was $8,000. The buyers settled for a credit from the sellers for $4,000, because they figured that a new roof would enhance the property's value. When they purchased the house, they knew they were buying a house with an older roof. However, they hadn't planned on having to replace it so quickly. A credit for 50 percent of the cost of a new roof seemed reasonable.

Sometimes an agreement can be reached by obtaining estimates from several contractors. Contractors' prices can vary widely. A lower bid can help put a deal together. Often it's wise to get a second opinion. Inspectors sometimes make mistakes, or err on the side of caution due to liability concerns.

THE CLOSING: If the sellers give you a credit for repairs, make sure you get the work done. Otherwise, you could be stuck with an even larger repair bill when you sell.

Dian Hymer is author of "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.