Backing out of a deal based on bad inspection

24 Replies

Hi everyone,

I am under contract with a turnkey SFH. I received the inspection report back and there are some things that definitely concern me. There are foundation issues, minor termite damage, slanted walls and floors, and electrical issues to name a few. After speaking with the inspector on the phone, he offered me a grim outlook on the property and suggested that I do not buy it.

I am thinking about backing out based on this inspection. I have paid $1000 for the EMD. The contingency period for the inspection is technically over because the inspection occurred ten days after going under contract. However, the initial inspection was delayed by the turnkey provider because of construction on the property that made an inspection on the initial date impossible.

For everyone's reference. House cost is 100k. I did reach out to the turnkey company yesterday and listed all of my issues on the inspection report to see what they can do about the issues, haven't heard anything back yet. 

I am a newbie investor so any help is appreciated!

What does the exact language say on your contract in regards to the inspection. Do you only have 10 days to get inspected AND submit report to seller? Or 10 days to inspect and extra x days to get back to seller with issues. Do you have proof that you attempted to inspect within 10 days and was stopped because of their construction issues?

@Ibrahim Hughes I re-read the contract and the contract states that I have ten days from the contract-effective date (2/14/2020 in this case) to have the inspection. The inspection was done on 3/19/2020. I do have proof that the inspection was delayed on their behalf.

The contract also states that after the inspection I may cancel the contract based on the inspection revealing the property in unacceptable condition. I have 5 days to do so from the seller receiving the report, which was yesterday. 

I agree with @Ibrahim Hughes above.  Make sure you have documentation that you tried to inspect earlier and they held it up.  If you have an email, etc you're in much better shape.  

You have 3 options that I see...

1. Push hard for your earnest money to be returned stating all the items above (inspection issues and the documentation that they delayed the inspection.)

2. Walk away and lose your $1k.  That's a huge bummer, but if it is a money pit sometimes a little loss is better than a huge loss.  

3. Request that they fix all the items that you found in your inspection.  If they can fix all the big ticket items, it could still turn out to be a decent deal.  

They can't say yes, if you don't ask!

@Kevin Hoff

When you buy whether turnkey or not, always conduct your due diligence.  The inspection contingency is to have the inspection conducted within ten days (typically depends on your state or contract language).  The issue whether you cancel the contract or not is subject to your contract language.  Anytime you are close to the 10 day inspection period, you should always request an inspection contingency extension. If you have an attorney representing you they make sure those contingencies are adhered to.

The term turnkey to most of us means it is move in ready where the rehab has been completed.   I congratulate you on conducting your due diligence by having the property inspected.  If the repair costs make the project not a viable project walk away.  The turnkey provider may return your EM when they look into the comments from the inspection.  Clearly this is not turnkey based on your inspection report.

Good Luck. 

@Andrea Weule Ideally I would like option 3. I've asked them to fix the problem items in the inspection, so I will see what they say (I asked yesterday and they haven't gotten back to me). If they can't fix them, then I'll back out and losing 1000 worst case scenario will not be the end of the world.

@Kenneth Garrett This is why I was shocked when I got the inspection report back because I was under the impression that everything would be good to do because of the term turnkey. And lesson learned about inspection contingency extension. 

Thanks everyone! Much appreciated help

Losing your earnest money is not the worst case scenario. Many people on the forums seem to think thats the case, but rarely is that the actual worst case scenario.   Worst case scenario is being sued for specific performance, or being sued for the delta between your contract price and the eventual sales price.

@Kevin Hoff - I agree with @Russell Brazil 's post.  Walking away and losing your earnest money is not the worst case scenario here - you can chalk up your loss of the earnest money and inspection fee as an "educational expense" - considering how many people spend thousands of dollars on "guru courses" without receiving any tangible direct experience for their money, you just got a first hand experience in real estate for less than the guru's charge.  

I'm not a lawyer whatsoever, and this isn't legal advice - but if your contract clearly has a clause in it that states you can break the contract within 5 days of the inspection if the property is unacceptable, then you likely have a fighting chance of getting your earnest money back (although I suspect it will involve small claims court), and you likely won't be subjected to the worst case scenario as Russell described.  Good luck.  

Consider asking them to make all repairs, pay for the re-inspection or cancel the contract and demand a full refund of your EMD.

Ideally, an extension for your due diligence should have been executed, but this delay was at no fault yours and the sellers never sent you a demand to release your inspection contingency so it’ll be hard for them to enforce given the circumstances. 

Begin corresponding in writing. Typically, TK providers want to do what’s fair. I don’t think they would want you clouding the title for 1k ; )

To your success!  

@Michael S. Thanks for the advice! I definitely want to avoid going to court at all costs. I’d much rather lose the 1k than have to deal with a court case. Lesson learned.

In everyone’s experience, how often do these situations go to court?

@Kevin Hoff This is why it is important to have an agent and/or attorney working on your behalf in general and especially when you are do business at a distance. 

There is a simple remedy for this and that would be extending your inspection contingency. It is literally one piece of paper and a 1-line addendum, but the purpose of it is to protect your deposit. Do you have anyone representing you or are you doing things solely through the turnkey company?

@Kevin Hoff I would push to get your EM back and walk away. You should have modified the contract when they pushed inspection date back, so if all else fails there is your $1k lesson. Any turnkey company that is going to sell you a property that is that messed up and hope you buy it without noticing is a company I wouldn't trust even if they said they were going to fix it. I would look for another company and property.

Personally I would walk away.  

Those items could get pricey and sometimes with termite damage there are things you can't see til you tear into it.

They will either agree to fix, lower the price or tell you the price stands.

I see. I'm assuming that company is holding the emd as well. Your best bet is to request to be reimbursed based on the sellers hindrance of inspection within the proper time frame.  If they refuse, by law you can hold an arbitration between you and the seller to dispute the emd. You can do this by contacting the local board of realtors in your area, pay a fee of est. $200 and they will organize the dispute with a mediator. A few pieces of advice for future reference...1.) Find a realtor who specializes in investment. A commercial realtor will be able to do wonders for you in the realm of providing direction even if the property is residential. (Typically the seller will shell the costs of the realtor.) 2.) Always put your emd into escrow with a title company of your choosing! Do not let the seller hold or the sellers title hold the emd. 3.) 10 days is the default amount of time for an inspection you can alter it and lengthen it as long as you like. Best of luck Kevin!

@Kevin Hoff , No problem Kevin. Lessons learned is exactly right. I was an investor prior to becoming licensed and I purchased my first property just about the same way. I was not as smart as you and I held on. Cost me an enormous amount of time and money. Cheers brother!

Update,

I spoke with the turnkey company and they are offering to fix everything that concerned me in the inspection. That being said, as long as everything is fixed should I move forward with the deal? I feel good about the numbers, but am unsure if I should be conserving cash because of the corona virus.......

Thoughts?

I didn't even read the thread...just had to read your last comment. It's completely standard for things to come up on an inspection with turnkeys. Despite what would seem logical. I want to defend this because turnkeys get a bad name anyway, and since everyone assumes the inspection should come back clean, that only further hampers the reputation. People want to freak out early on a turnkey inspection when the proper process, just as you did, is send a list of all the repairs to the turnkey seller and see what they agree to. Then they fix what they agreed to and then you have your turnkey property. You did it exactly right-- I just say it so anyone else reading this thread understands that this is all normal. As far as whether you should buy because of coronavirus or not... what would conserving cash do for you unless you're concerned about job security? Interest rates are record low right now and even Warren Buffet put out an article recently saying buying properties is one of the #1 things he'd do during this time. (I'd link to it but I don't know that non-BP links are allowed?). Anyways, hope that helps.