What Investors Need To Know About Inspection Contingencies
Real estate investing is simple; it’s about maximizing returns and minimizing risk. One of the best ways you can reduce your risk exposure in investments is by including inspection clauses in your property contracts.
Investors need inspection contingencies; these contingencies give them a way out of a purchase if, on closer inspection, the property isn’t all what it was sold as.
We saw a huge boom in homebuyers and real estate investors waiving these inspection contingencies during COVID, and we’re going to tell you why, in most cases, you as a real estate investor never want to waive the inspection contingency.
What Are Inspection Contingencies?
Inspection contingencies are parts of real estate contracts that provide buyers the chance to check over the property in detail before committing to buying it. These "what-ifs" are meant to protect buyers from unforeseen problems by allowing them the ability to renegotiate the terms of the transaction, ask for repairs or a lower price, or even back out of the purchase without penalty if the inspection shows major faults.
As an investor, adding inspection clauses to your contracts will dramatically lower your risks, help make better investments and, most importantly, protect your capital.
The Importance of Inspection Contingencies
Protection Against The Unknown: No matter how deep you do your due diligence, it’s impossible to know about every problem that could happen with a home. Inspection contingencies allow you the chance to find any hidden flaws with a property before you are legally obligated to buy it.
Gives You Negotiating Leverage: If a home inspection finds problems, you can use this knowledge to negotiate a lower price or ask the seller to address the problems before the sale closes. This can save you a lot of money and help you make sure you're getting a good deal.
Reduces Risk Exposure: Investing in real estate comes with inherent risks, but inspection contingencies can help reduce some of those risks. These contingencies can help you avoid making mistakes that, without an inspection contingency, could cost you a lot of money.
The Risks Of Waiving Inspection Contingencies
Even though inspection contingencies are good, some investors can be tempted to waive them in specific cases. This usually happens in markets where there is a lot of competition and buyers feel driven to make their offers more appealing to sellers. Choosing not to have an inspection may provide you a competitive edge, but it's vital to think about the risks:
- Hidden Issues: By not requiring an examination, you're basically agreeing to buy the home "as is," without the chance to find any problems. This can lead to repairs that come up out of the blue and cost a lot of money and nullifying any ROI on the property.
- Limited Leverage: If you waive your inspection contingency and then find faults with the property, you’re already locked into the contract, and the seller may not be willing to lower the price. This means you’ll be left holding the bag.
- Increased Liability: If you buy a house with the aim of renting it out or selling it again, you could be held responsible for any problems that come up after the transaction that were not mentioned. This could lead to expensive lawsuits or other costs that could have been avoided if there had been an inspection clause.
Why Waiving Inspection Contingencies Is Generally Not a Great Idea
In a competitive market, letting go of inspection contingencies could seem like an attractive move, but it's usually not a good idea for real estate investors.
- Increased Risk: By forgoing an inspection contingency, you're violating the principles of real estate investing and taking on more risk than you need to. Investing in real estate is already a risky business, so the last thing you want to do is increase that risk for a small competitive advantage.
- It’s Short-Sighted: Unexpected problems with a property can cost investors thousands in unnecessary spend in the long run. If you can't get back the money you spent on repairs or renovations, your ROI will plummet, which could put a lot of stress on your finances and your investing business.
- Potential Reputation Damage: As a real estate investor, your reputation is crucial to your success. If you become known for purchasing properties with significant issues, it could deter potential tenants or buyers, making it more difficult for you to succeed in the industry.
Is It Ever A Good Idea To Waive The Inspection Contingency?
In rare cases, experienced investors who know a lot about a specific property or location, and have the financial resources to fix any hidden problems may choose to drop the inspection contingency to make their offer more appealing to sellers.
But for most investors, the risks of not going through with the inspection much outweigh the possible rewards. Investors should look at waiving the inspection contingency as a, “break glass in case of emergency” option, where there is a significant deal on the line, and they need to improve their offer.
So - should you ever waive the inspection clause? Unless you’re an experienced investor with deep area knowledge, probably not. It’s one of the most important tools investors have to shelter themselves from risk and make better investing decisions.
Speaking of better investing decisions, Leadflow’s provides investors with the fundamentals of real estate investing, and our next-generation lead tools help investors capitalize on this knowledge, every day.
Ready to see what it can do for you? Grab your free 7-day trial below!