The Inspection Period Is Not the Enemy

I received an email from a broker this week titled “An Applause for the Clause.” I agreed with the practical suggestion in the email. I disagreed, however, with the premise behind it.

The email suggested that smart buyer’s agents use the right to terminate an “as-is” contract as a way to bully sellers into giving additional concessions and, even worse, sometimes use the inspection period to tie up one property while their buyer continues shopping for another.

Does that happen? Of course. There are buyers, sellers and agents who abuse virtually every contractual provision available to them.

I just do not believe that describes most buyers.

In my experience, most buyers who put a property under contract genuinely want to buy it. What they are doing during the inspection period is exactly what we should expect a rational buyer to do: investigate the property, understand the deal and negotiate the best transaction they can before their ability to do so disappears.

That is not necessarily bad faith. That is negotiation.

Buyers Have Real Money on the Line

By the time a buyer begins asking for repairs or credits, they have usually already invested meaningful money in the transaction.

A home inspection alone can cost several hundred dollars. Add a mold inspection, roof inspection, HVAC evaluation, sewer scope, engineer or other specialists and it is very easy for a buyer to spend $1,000 or more investigating a property they do not yet own. At the same time, they may be working with a lender, obtaining insurance quotes, reviewing association documents and preparing for an appraisal.

Most people do not spend that kind of money because they are casually reserving a house while they continue shopping.

They spend it because they want to buy the house.

What can change during that process is their understanding of the house—or their understanding of the deal.

Maybe the roof is worse than anticipated. Maybe the HVAC systems are nearing the end of their useful lives. Maybe insurance is dramatically more expensive than expected. Maybe the inspection uncovers $25,000 in work that the buyer did not factor into the original offer.

At that point, the buyer has a contractual decision to make. The buyer can accept the property as originally negotiated, terminate if the contract permits it, or ask the seller to modify the deal.

I don’t consider the third option inherently unreasonable.

Trying to Get a Better Deal Isn’t the Same as Wasting Someone’s Time

This is where I part ways with the characterization of these negotiations as buyers “bullying” sellers.

Assume a buyer learns during the inspection period that the property needs a roof sooner than expected. The buyer asks for a $15,000 credit.

The seller can agree. The seller can offer $5,000. The seller can offer nothing.

The buyer then has to decide what to do.

That is a negotiation between two parties, each of whom has leverage and each of whom is trying to make the best financial decision possible.

The buyer knows the inspection period is about to expire. If there are legitimate concerns about the property, this is the time to raise them.

In fact, I would much rather have the buyer raise every issue now than remain quiet, close on the property and complain afterward that everyone knew about a problem and no one addressed it.

Negotiating aggressively does not necessarily mean the buyer never intended to close.

Trying to get the best possible deal is not the same thing as negotiating in bad faith.

There Are Lots of Reasons Deals Fall Apart

The article from Money that originally caught my attention makes the same broader point. Buyers cancel transactions for many reasons: inspection discoveries, changes in financial circumstances, mortgage rates, property taxes, insurance costs and simply realizing that the true cost of owning the property is different than expected. (Money)

That is particularly relevant in Florida.

A buyer can love the house and sincerely intend to close, only to discover during the transaction that homeowners insurance costs far more than anticipated. The same can happen with flood insurance, association expenses or necessary repairs.

More recent Redfin data also shows something important about the current market. The highest cancellation rates are concentrated in many of the strongest buyer’s markets, particularly Atlanta, Florida and Texas. Redfin notes that buyers in those markets simply have more options and may be less willing to overlook problems when inventory gives them alternatives. (Redfin)

Again, that isn’t necessarily evidence of bad faith. It is evidence of leverage. And leverage changes with the market.

A few years ago, buyers were waiving inspections, waiving appraisals and offering over asking price because they were terrified of losing the house. Today, in many markets, they have more choices.

We shouldn’t be surprised that they use that leverage. Sellers certainly did when they had it.

Where I Agree With the Clause

This brings me back to the original email, because I actually agree with its practical recommendation.

Once the inspection issues have been negotiated and resolved, it can make perfect sense to close the door on any remaining inspection termination right.

Depending on the particular contract, language may be as simple as:

“Upon execution of this Addendum, Buyer waives any remaining right to terminate the Contract pursuant to the inspection provisions of the Contract.”

If the seller is agreeing to a repair, price reduction or credit to resolve the inspection, there is nothing wrong with requiring certainty in return.

I frequently describe this as “give and get.”

If the seller gives something to resolve the inspection, the seller should consider what he or she is getting in return.

But even here, agents need to understand the contract they are using. Some inspection provisions already give the buyer only one election or request. Once that election has been exercised, the buyer cannot necessarily continue making new inspection demands (NABOR’s standard contract). There may also be separate contractual issues, such as permits, that survive independently of the general inspection process.

So before adding language, read the contract and understand what rights actually remain.

Good Contract Management Doesn’t Require Assuming the Worst

That is really my disagreement with the premise of the email.

I like the clause, I just don’t think we need to assume the buyer is trying to take advantage of the seller in order to justify it.

Most buyers are trying to buy the property. They are spending real money investigating it, and they have a relatively short contractual window to determine exactly what they are buying and whether the economics still make sense.

During that window, they may negotiate. Sometimes they may even negotiate aggressively.

The seller is equally entitled to negotiate aggressively in response—or simply say no.

Once the parties reach an agreement, closing out any remaining inspection rights can be smart contract management. But that should be because the inspection phase is finished and both parties deserve certainty going forward, not because we presume the buyer was acting in bad faith.

So yes, an applause for the clause.

Just not the indictment of the buyer that came with it.