Inspection period

15 Replies

hello, 

I have a question about something iv seen a lot on here but I haven't seen in any books iv read about wholesaling. I am wondering what the inspection period is, what it's for and pretty much anything else about it. I know it's kind of a broad question so any info helps, thanks.

I have never wholesaled, but why would someone be willing to sell you their property for $.50 on the dollar AND give you an inspection clause?

Is this common?  I would think as a wholesaler you are in more of a position of strength if you can provide an offer with no contingencies.  

The inspection can be done for an investor for informational purposes.  Yes most investors are buying properties for pennies on the dollar but it's still important to know what you're buying.   I have seen where some investors have included in the contract of Sale to sweep for an underground oil tank as a contingency. 

It seems like no one has answered your question yet. The inspection period is a common "contingency" in an offer to purchase real estate (a financing contingency being the other most commonly used).

When you make an offer, you're basically saying, I'm offering to buy your property for $100k, and I'll put up $1k (these numbers are made up) as earnest money or an escrow deposit. If you accept my offer and then I break the contract, you get to keep my earnest money (that's why more earnest money generally equates to a stronger offer).

Then you can add contingencies, such as:

Inspection Period - I want 10 days (or whatever amount of time you negotiate) to thoroughly inspect the property. If I find anything wrong with it or any surprises (or my repair estimates come back too high), I can back out  of the contract and not lose my earnest money.

Financing - if I am unavailable to get financing at acceptable terms, I can back out of the contract and not lose my earnest money.

There are very legitimate reasons to ask for an inspection period (for example, maybe the utilities are turned off and you are unable to inspect plumbing, electrical, or HVAC without them being on). 

But some investors (sometimes on the advice of "Gurus") make lots of offers without seeing a property, then use the inspection period as an "out" while they tie up the property for wholesaling or whatever.

As a seller, an offer with no inspection or financing contingency is much stronger than a comparable offer with these contingencies included, so use them wisely.

thanks Jeff that's what I was looking for, would you say to use this contingency for wholesaling or would you be better off trying to just walk around and looking for yourself and find things for your self to try and get a lower price starting out

@Garrette Becker  - Sorry for the delay, I was out of town.

First of all, I don't really think you have any choice but to use an inspection contingency if your sole intent is to wholesale a property. If you get a property under contract with a 10 day inspection period, then you have 10 days in which to assign the contract to another investor, or back out and not lose your earnest money. 

Personally, I don't like this tactic and don't recommend putting a property under contract unless you are in fact willing to meet the terms of the contract and buy it if it comes to that. 

However, if you got properties under contract with no contingencies, then lost your earnest money on every contract you were unable to assign, your career as a wholesaler would be a short one indeed!

Conversely, as a rehab/flip property, use of the inspection contingency may or may not be warranted. If the utilities are on and you are able to conduct an inspection prior to making your offer (and you have the knowledge, skills, and ability to do so and accurately estimate repair costs), then you might not have a need for an inspection contingency.

You could also just skip the inspection and assume the worst as far as repair costs go - if you can afford to absorb any surprises that might pop up as a result of not doing a full inspection, and the numbers still work, then why not make an offer that plans for the worst and hopes for the best (in terms of repair costs)?

Finally, the value of a piece of real estate is the value, period. Including or excluding contingencies in your contract does not change the value, per se, and doesn't necessarily mean you will pay more or less. But it can definitely make your offer more attractive in a competitive environment. 

For example, imagine you have a home for sale that is valued at $100k at full retail, but it needs $10k worth of work (making it worth $90k) and you're willing to take a discounted price of around $84k for it because you just got a new job in Timbuktu and you need to cash out and move as soon as possible. Which offer would you take?

  • Buyer A is offering $84k cash (no financing contingency) with a $4,000 earnest money deposit, but is asking for 10 day inspection contingency and the right to assign the contract.
  • Buyer B is offering $84k with a $2500 earnest money deposit, a 10 day inspection contingency, and a financing contingency.
  • Buyer C is offering $83,950 cash (no financing contingency) with a $3000 earnest money deposit and no inspection contingency.

Most sellers would take Buyer C's offer over the other two in a heartbeat - they are all essentially the same dollar amount, but if you take C, the deal is essentially done. You are either going to close on the sale in 30 days or so, or keep the buyer's earnest money.

If you take A, you risk tying your property up for at least 10 days, and having the buyer back out based on something they find during the inspection period. Then you get nothing and you have to start over and relist your property for sale.

If you take B, you have the same inspection risk as A, as well as the risk of the buyer not getting financed (which could take even longer than 10 days depending on the terms of their financing contingency).

Hope that helps!

thanks for all the good info Jeff that clears up a lot of unasked questions.

One good reason for inspection as far as wholesaling is concerned is this gives you opportunity to perhaps pay for rehaber/contractor to go in and give you a hard quote. Depending on the season (busy or not) ... let's say it's summer time & contractors are busy, then you may need to pay them 50-100+ for their time & expertise.

Again this is more money invested, kinda along the same lines as Jeff states about losing earnest money... you could pay for hard quote & not get your offer accepted then you're out that money. 

Hope this tip helps ;)

Talk soon,

Kelly

I am glad @garrette Becker asked this question.  I hope you don't mind me adding on :). 

So what are the thoughts on advertising no contingencies but telling the seller 'I do need 48 hours to look over the house to give you the fairest offer that will close quick'.  Then using that 48 hours to get the gc in and out,  run the numbers and find a buyer?  That way the inspection actually is done before the offer is given; the end buyer will be given real numbers and even a day to check out the house personally if they choose? 

Please, any and all constructive input would be appreciated. 

Erin

@Erin Elam - Anytime you can do your due diligence prior to the offer and not have to use an inspection contingency, that makes your offer that much stronger (all other things being equal).

However, in some cases, the utilities (water, gas, electric) may be off - making an inspection of the plumbing, electrical, appliances, and HVAC impossible. Not inspecting these can be a big risk.

You may also be competing with other cash buyers and need to move quickly. In this case, the inspection contingency buys you some breathing room for your due diligence, and that's what it's intended for - get in under contract, then take use your inspection period to do an in-depth inspection and confirm your rehab numbers.

Conversely, if the property is an "off market" lead and you're confident that you're the only one working with the seller, then you might be able to take your time. 

It all depends on the situation!

thanks @jeff Copeland! That's great advice. 

@Jeff Copeland

This post is helping me a lot in a similar situation I am in right now and would love to have your input,. I posted it yesterday here: https://www.biggerpockets.com/forums/93/topics/293...

I do not intend to abuse the "inspection period strategy" but do need to understand how to use it in case of the deal going south. As a newbie, a safety net is always nice and help me overcome the fear of ending in a big mess.

You being in Florida may know big "NO NOs" to make sure I don't shoot myself in the foot.

Thank you in advance!

The inspection period is an agreed upon number of days that starts After you get a Fully Executed Contract. So you put in your offer with a seven day inspection. You start due diligence now! Then your offer gets accepted. You sign papers, could take a few days. Then It may take 1-2 weeks for the listing agent to bring you a Fully Executed Contract. Then your 7 days inspection starts. You can back out for any reason during that entire time, and you've had approx 3+ weeks to do your due diligence. By no means should you put offers on properties you don't entirely mean to close on. But should something come up, this is your "safe" period to back out and your deposit is returned. The listing agent ( or seller if you're dealing with a homeowner) is required to make the house accessible for you inspections within reason during this time. 

@Chelsea Tustison I put in an offer for a triplex and he said he has multiple offers. Within the same day he accepted my offer he is already giving me a contract. Should i be cautious? However at the same time i dont want to lose out on this deal!

 @Yousef Reda  If you've run your numbers and they seem good, then you should be excited. Either he really didn't have any other offers and was motivated, or your offer was the highest and best. Either way, as long as you didn't offer too much (which you would have made sure of before you put the offer in) then get working to find a buyer. Remember, you have your inspection period (which goes into effect after you've signed) not only to show to potential buyers, but to have contractors look at it and give you a more accurate estimate of repairs. 

Since this is an older thread, and your new question is off-topic, feel free to PM me if you have any more questions, I'm happy to help.

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