What if the property I am buying fails inspection?

Question

I do not like the fact that I can only do a close inspection of a property I am buying after signing the purchase agreement. This seems to open a can of worms, if I find serious problems, and the seller wants to be difficult.

I'm looking at 3-4 unit buildings. I've been told that up to 17 days after the start of escrow it is easy to withdraw from the contract if I find serious problems in the building. Is this true?

Jon Holdman · Answer

Always write your offer to state "liquidated damages" (i.e., your EM) rather than "specific performance".  That way, the very most you have at risk is the EM.  If something that would cause you to suffer a huge loss comes up at a point where you cannot bail out, you will lose only your earnest money.

Account Closed · Answer

It's possible that the seller has the option of repairing the items you are objecting to, in which case, you'd still be under contract.

It should all be in the offer that you submit. I don't like to have the seller do repairs, because they are going to take the path of least cost. I would prefer to do repairs myself to make sure they are done to my standards.

Steve Babiak · Answer

If you need to hire an inspector, you will somehow be paying for that inspection.  If you don't buy as a result, it's good money that was spent.  In terms of money spent, make's little difference if it is before or after being under contract.

Timothy W. · Answer

If you're buying a rental property (which it sounds like you are), landlords get real sick of constantly having to handle coordinating appointment with the tenants and the tenants getting jumpy about all the buyers coming through.  You can tell a tenant a million times that a new buyer does not cancel their lease agreement and they still get jumpy about it.  I don't let anyone but serious buyers inspect my properties.  They are asking permission to come on my land and into my buildings.  For that liability and tenant management exposure, you owe it to me to show me your serious.

Jon Holdman · Answer

Your contract will specify the inspection deadline.  You can certainly do all the inspections you want before you get an agreed-to contract on most properties.  But you will waste a lot of time and money on the inspections.

Building don't "pass" or "fail" inspections.  The inspector notes problems, then you haggle with the seller over the price.  Certainly you want to look at the building carefully and consider what you see in making offers.  Make the offer based on what you can see and expect.  Then, if something significant that you didn't notice is brought up by the inspection, renegotiate.  Up until the inspection deadline, you can always just plain back out of the contract and get your EM back if the inspection is not to your liking.

In my experience, inspectors point out a bunch of obvious problems, so you can almost always find some reason to escape, if that's your choice.

Mark Hu · Answer

I can see the seller's point of view, and I am not trying to change the system. But it does make things very inconvenient. You never know for sure what's really going down at the property until after the contract is signed and good money spent. Ugh! Might as well not even look at the property before buying it.

Alan Brymer · Answer

I've always had an agreement worded to say that the contract is contingent upon my approval following an inspection.  The few times I've used it, I either did a more thorough walkthrough myself, or a contractor did.  I have rarely paid for an inspection because contractors usually notice everything that needs repairs and since I don';t buy and hold I don't really care about long-term problems.

Steve Babiak · Answer

There is one way that the seller CAN use to get around the inspections: you have to get everything done in a timely manner.  If you don't meet all deadlines for the inspection clause, then you are buying it either way.

Mark Hu · Answer

I won't worry then, about discovering something very nasty on inspection. It sounds like I won't have a problem backing out if, lets say, I find massive water damage in a building.

I just dislike the idea of signing a contract before I am sure of what's going on inside the building. Yes the purchase agreement covers inspections, but I was wondering if there were 'creative' ways for a seller to get around those sections. I guess there aren't any.

Brian Levredge · Answer

You have to look at it from the buyer's perspective.  Why would they want to submit their property to inspection without a contract for purchase in place?  It would be a huge waste of time because of all the window shoppers you'd get.  Jon is right though.  Inspectors only point out certain things.  There are many things they don't look hard enough at, like foundations, which are really the most important.

If memory serves correct, in CA the contingencies are active, meaning the buyer has to remove them in writing.  This gives you leeway if you and the seller can't come to terms over repairs or credits related to those repairs within that time frame.

What if the property I am buying fails inspection?

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