How to negotiate away the Home Inspection Contingency as the Seller
An original thought, so far as I know
As you probably know, in 2021 & the first half of 2022 it was a seller’s market. This was as true in the DC Metro as almost anywhere else in the country. Winning offers had no contingencies, this was the norm. In this seller-sided environment, at least in the DMV, it became a common practice for buyers to perform pre-offer home inspections. As the name suggests, a pre-offer inspection is a home inspection performed before the prospective buyer submits their offer. They did this so they could have the benefit of knowing the defects of a property and still achieve the strength of an offer that omits an inspection contingency. When sellers review offers, they’d prefer one without an inspection contingency over one with. However, just because their offer was inspection contingency free didn’t mean they necessarily won the contract, perhaps five to fifteen other prospective buyers did the same thing. It follows that a buyer could pay for any number of these pre-offer inspections before they finally got a home under contract.
In the words of Bob Dylan, times they are a-changing. Our market has become much more even. Low inventory and a low number of buyers has limited the number of transactions occurring but neither the buyer or seller has a clear advantage over the other. Pre-offer inspections occasionally still occur but they are the exception not the rule. In 2022 I started the process of selling my modest rental portfolio of eight houses. I was a bit envious of those earlier sellers that had received offers without inspection contingencies. I was jealous enough that I thought, I’d gladly pay for an inspection out of pocket in order to get a pre-offer inspection. Followed by my eureka moment, maybe I can?
Thinking through the details
My plan needed to accomplish my goal of getting an offer that didn’t have an inspection contingency and address the following realities:
- If I didn’t intend to alienate a huge swath of buyers I needed to grant the buyer the opportunity to have a licensed home inspector of their choice inspect the home.
- When I’m on the sell side I always convey to the buy side that a pre-offer inspection would be welcomed and favorable. Even though the suggestion is out there the reality is that I shouldn’t expect folks to do this all on their own dime in this market.
- I didn’t want to pay for all or even part of numerous inspections, that could add up. I know the close prices of my rentals will all be between $100k-$200k. Paying too much out of pocket would eat into profit.
- I wanted to keep the buyer to some extent invested, pot committed. I needed them to to have some money on the line should they decide to walk away.
What I did
So far, I have listed three of my rentals, two have now sold and the third is under contract. All three had no inspection contingencies in the offer I accepted. Initially I received no offer that waived the inspection contingency. I took the best offer a verbally countered with the following:
- Do a pre-offer inspection then strike the inspection contingency if you choose to move forward.
- I’m willing to pay for half of a pre-offer inspection directly to the inspector.
- I’ll agree not to accept any other offer until after they get the chance to review their inspection (that date was specified).
- If a better offer does come in prior to them completing their inspection I would share a copy of that offer with them and give them the opportunity to match that offer.
- I’m willing to put this in writing.
- In exchange, the inspection report would be made available to me upon request, but not provided to me without request.
The biggest talking point of my pitch is that I’m willing to pay for half of the inspection and the buyer is still free to walk away if they don’t like the results of the inspection, and actually for any or no reason at all. The reason for the caveat about providing or not providing the report is that I may not want to know about defects that were previously unknown to me. Knowing about material defects would require me to disclose this information to other prospective buyers.
I’ll go into more detail below as to why a no inspection contingency offer is so important to me. For now suffice it to say that given my circumstances it wasn’t a close contest between paying the cost of half an inspection ($100-$237 in my case) and the cost of accepting an offer with the contingency.
Honestly I had no idea how my plan would go but there really wasn’t much to lose. The worst they could do is tell me no. That would be fine, I’d be in the same position I already was in.
I was quite pleased with the outcome, I received virtually no push back on any of those three deals. It did require some explaining on how the mechanics would work. One buyer agent even put me on a three way call with their buyer client to explain which is pretty unconventional. It was interesting to me that none of the three buyers had me put the terms of our verbal agreement in writing. I think because I was offering to pay for half of their inspection up front it showed that I was acting in good faith and that my goal was to get them under contract, albeit without that contingency. It should go without saying that once the buyer side provided me with the inspector’s payment instructions I paid my half immediately, within minutes!
Why I care so much about removing this contingency
The truth is I don’t always. For the three sales above I did. Like I mentioned these were rentals. I had done various degrees of renovation to prepare them to be listed. By no means had a thorough evaluation of all the systems been conducted. I didn’t have any knowledge of anything big but it was certainly a possibility that something significant could come up. Other times where I have bought houses to flip and did full, to the studs, gut-job renovations I wouldn’t deploy this tactic. I would be confident that anything found I could easily have corrected and likely at no cost because the work would be under warranty.
The biggest reason I care about removing the contingency in these instances is the timing of negotiation. Before the contract is ratified I still have tons of leverage as the Seller. I can continue to negotiate with the Seller, I can try to find another buyer, I can fix deficiencies myself if that’s most cost effective and I could even decide not to sell it, continue to rent it out. Before ratification the buyer will likely still want to negotiate on items discovered in an inspection however they will be more inclined to be very reasonable with what they are asking for because they don’t have it locked up yet. They might look past some items.
Once a contract is ratified with an inspection contingency, my leverage is just about zero. If the buyer asks for a ridiculous amount of money off of the sales price I’m in a tough spot. If I say ‘no’ and the deal falls through I have wasted time and I’m back on the market but this time looking weak. This perceived weakness can cost thousands or even tens of thousands (depending on the price point). Future prospective buyers will all want to know why the deal fell through. They may assume the property isn’t worth my list price, even if my initial contract was above the list price. Later buyers may want to do an extra thorough inspection and even contract additional system specific inspectors. Also if I was made aware of material defects in the process I’d need to disclose those which could bring less foot traffic to my listing and reduce incoming offers.
Additional nuance
I don't think the above is always the right strategy. For instance in cases where the best or only offer you have has numerous other contingencies I think it's unlikely worth the extra cost and effort to remove this one. Specifically when there are other contingencies in place that will give the buyer an opportunity to negotiate down from the initially contracted sales price. Or contingencies that allow the buyer to unilaterally terminate the contract. For example in MD, DC & VA buyers purchasing homes that are part of an association (i.e. COA or HOA) statutorily are afforded a review period of the association documents. During that period the buyer can walk with basically no consequence for any or no reason. I'd be much less inclined to deploy this strategy when selling a home that's part of an association or when there are numerous other ways for the seller to terminate or negotiate further.
Other contingencies that are mainly outside of the Buyers control don’t steer me away from this strategy so much. I’d generally still use this strategy when the buyer has a financing contingency. Interviewing their loan officer regarding what diligence has already been done prior to accepting their offer should mitigate the chance of having an unpleasant surprise later. So long as the buyer is acting in good faith they are trying to successfully get their financing. My incentive is aligned with the sellers. The same concept is true for an appraisal contingency, I’d still use this strategy.
Why not just get your own inspection prior to listing?
I’ve seen instances where sellers will have their place inspected by a licensed home inspector prior to listing. They might fix some or all of the punch list items uncovered and then have the report updated to reflect those repairs. Or perhaps not, they deem the condition as reflected on the report to be ‘good enough’. Regardless the idea is to share the report with prospective buyers prior to receiving offers. Hoping that the buyer will forgo their own inspection. Or possibly hoping to strengthen their negotiating position should a buyer perform their own inspection and find the same deficiencies. After all, if a buyer was told up front about a needed correction it would be hard for them to successfully negotiate on an item that wasn’t newly discovered.
While I don’t hate this strategy I don’t think it’s as good. I think the buyer perception is that the seller is trying to bully them into a no-contingency offer based on one home inspector’s opinion, a home inspector that they didn’t select and that they might not trust. That inspector was hired by the Seller, was it his buddy? Did the seller convince him to omit some items or put them in a more favorable light?
If the buyer with the best offer still insists on their own home inspection I think a seller is setting themselves up for unnecessary conflict. What if the two home inspectors have differing opinions on something? Additionally there are now two inspections being performed, you would think two inspections would uncover more defects than one.
Further implementation
When selling for myself, no question, I’ll continue to use this strategy when the circumstances are right. However, there’s a big difference between doing something unconventional for yourself as the owner/investor and recommending it to a client as their agent. Sellers are incurring a lot of expenses when selling their property. Costs to prepare their home for sale, staging, commissions, transfer taxes, closing costs, moving expenses, let alone all the costs that come with the purchase of their next place. Geez, hopefully they are selling for a big gain, right? To recommend that they pay for one more thing sounds like a painful ask. One more thing that they haven’t heard of other sellers paying for.
The selling costs listed above total thousands or tens of thousands (depending on price point), this one costs $100-$250 and could save them thousands or tens of thousands. What do you think? How would you feel if you real estate agent suggested this? Would you prefer your agent to think of creative solutions like this or would you rather them go by the playbook? I’d love to hear your opinion.