What You Need to Know About the Home Inspection Contingency

The first thing to know is that if you put anything:

  • in the contract or
  • in an amendment to the contract or
  • in a Notice related to the offer

That says something like:

  • Purchase price is lowered from $200,000 to $190,000 because of the defective roof or
  • Price lowered because of basement issues as detailed in the home inspection

Your friendly mortgage lender is going to require those defects or problems to be fixed BEFORE closing.

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A buyer or seller then typically asks, “Yeah, but why can’t we just set the money aside in an escrow account and have the items fixed after closing?”

Good idea. But that’s only an option if the weather prevents the item to be fixed prior to closing.

Need a new roof in January – okay, that can be escrowed. Need a new roof in August, but all the roofers are too busy?  Sorry.

Same thing with lawns on new construction. For example, Seller agrees to place $6,000 in escrow for future lawn and landscaping.  Can’t do it unless it’s winter. And by the way, any funds put into an escrow account for future work has to be accompanied by written bids or contracts. In addition, if those bids total $10,000, we require $15,000 to be put aside in the escrow account as a cushion.

So the funny thing is that the mortgage industry turns a blind eye to price reductions that happen midway through a contract, even though these price changes are almost always related to the inspection.  If the amendment says “price is reduced from $200,000 to $190,000 and buyer hereby waives inspection contingency” – no problem.  If the amendment says price is reduced because of bad roof, then we have a problem.

Accunet recently received an amendment from a buyer’s agent simply reducing the price. But then it goes on to say, “If seller agrees to this amendment, then Notice Relating to the Offer will not apply.”  Our experience is that most loan underwriters will quite naturally request a copy of the Notice. So we at Accunet asked for a copy of the Notice and sure enough the notice says “This is a Notice of Defect . Per Lines 410 thru 433 of the Offer to Purchase and the attached inspection report, the buyer objects to the following defects:  Condition of roof.”

This buyer’s agent was trying to cut corners or save time or whatever by giving the Seller both a Notice of Defect and a proposed amendment at the same time.  Problem is that by taking this approach, she ended up telling me as the lender there’s a problem with the roof, which the Buyer wants to take care of after closing.

Is it possible that an underwriter would turned a blind eye to the Notice that was referenced in the Amendment?  Only if they were tired or had two martinis at lunch.

We emailed the Wisconsin Realtor Association’s legal hotline and they agreed the idea of giving a Notice of Defect and proposed amendment at the same time was sub-optimal. They strongly recommend that you propose an Amendment first, allowing enough time for the seller to respond prior to the home inspection contingency deadline.  Then if the seller doesn’t respond, that’s when you go nuclear and deliver the Notice of Defects. That will either kill the deal if the Seller does not have the right to cure or trigger the Seller’s option to either cure the defects or kill the deal.

The lesson here? First, coordinate with your lender when making big changes to your original offer. And second, giving a Notice of defect should be considered the nuclear option. Be careful before you go down that path. There can be unintended consequences.

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