How to Stand Out in a Bidding War—Part I

Waiving the Inspection Contingency

In this competitive seller’s market, you probably heard of this term “inspection contingency.” In a bidding war or multiple offer situation, buyers often have to waive the inspection contingency and/or financing contingency to be considered. In many of these transactions, half or all of the buyers waived the inspection contingency. In almost all my recent transactions in Cambridge/Somerville/Charlestown/downtown Boston, the buyers who won the bid waived the inspection contingency. I always tell my buyers that if you can keep an inspection contingency in your offer, it is in your best interest to do so. However, since inventory is so low and there are so many more buyers, in many cases the seller wouldn’t even consider an offer with an inspection contingency. Such a seller’s market can be stressful for buyers. Boston has been a seller’s market for decades, but 2015-2017 has been particularly competitive for buyers!

What is an inspection contingency? Why is it important to waive the inspection contingency in order to win a bid?

An inspection contingency is a clause in the offer that protects the buyer from losing their deposit if issues come up during the inspection. According to a standard offer contract, a buyer is allowed to hire a licensed inspector to conduct an inspection on the property within 7 days after the seller accepts their offer. If the buyer backs out from the deal after the inspection due to inspection-related issues, the seller is required to return the deposit. In this case, the buyer backs out of the deal with no penalty.

In short, the inspection contingency basically means that the buyer’s offer is contingent upon the satisfactory result of the inspection. The buyer is only legally obligated to complete the transaction if he/she is satisfied with the result of the inspection.

What are some legitimate reasons for buyers to back out of a deal as a result of the inspection?

It could be that the property would require certain maintenance, such as roof replacement, which can be costly. However, roof replacement is normal and should be considered a necessary cost as part of home ownership. Most roofs last for 20-25 years and can range from $5000-10,000 to replace. If you are a home owner, you should basically budget $200-400 a year on average for your eventual roof replacement, which isn’t too bad, though a roof that needs immediate replacement can scare some first-time home buyers. When I bought my 3 family building, I had to pay $7800 to replace a broken sewage pipe. Many Boston properties are 100+ years old so this is not uncommon and should be considered part of the cost of home ownership. Other possible replacements are flooring, heating system, or even settling of the building foundation. Settling is one of the more costly kinds of repairs.

There are some gray areas concerning legally legitimate reasons to back out of a deal. Sometimes, reasons that the buyer backs out of the deal are not necessarily due to actual findings from the inspection and the seller may not have received documentation. Also, the process of getting the deposit back would involve seller’s attorney and the buyer’s attorney. Needless to say, backing out of the deal can be stressful for both sellers and buyers.

In other words, when a buyer has the inspection contingency in their offer, there is no guarantee that the buyer will actually complete the transaction after the seller accepts their offer. So from the seller’s perspective, there is a lot of risk with accepting an offer with an inspection contingency. That’s why in competitive markets in the Greater Boston area, buyers often have to waive the inspection contingency in order to win the bid. In some cases sellers wouldn’t even consider any offers with contingencies. If you are bidding for a competitive property type such as multifamily in the metro area, 95% of the time you have to waive all contingencies.

So, isn’t it scary to waive the inspection contingency? Is there any way around it?

Indeed, for many first-time homebuyers, they find waiving inspection contingency scary. Fortunately, there are several strategies to make your offer compelling without compromising your rights too much.

Strategy 1: Do a Pre-Inspection

You can schedule an inspection before you make an offer. How wonderful! You will be one step ahead of everyone else. What’s more, when your buyer’s agent mentions to the seller’s agent about showing the property to the inspector, the seller’s agent takes your offer much more seriously. The fact that the buyer wants to do a pre-inspection gives the seller confidence that the buyer has performed their due diligence. In many of my past transactions, sellers prefer to work with buyers who have done their own due diligence. As an experienced realtor, I have worked with many inspectors so I often help my buyers make appointments with good inspectors in the area. Keep in mind that there are a very limited number of inspectors who do walk-through at affordable prices, so buyers should schedule an appointment as early as possible. Weekend appointments tend to get booked up very quickly!

Strategy 2: Do an Inspection Cap in the Offer

An inspection cap is a clause that you include in your offer that says you are willing to complete the transaction as long as the repair cost does not exceed a certain number. A $5,000-20,000 inspection cap is common. The higher the inspection cap, the more favorable the offer is to the seller. The lower the inspection cap, the less protection there is for the buyer. The inspection cap is another safe way to protect yourself without making your offer less competitive due to the inspection contingency. I have done accepted offers for buyers with inspection cap, and I have negotiated for the buyers about the inspection cap. In my experience this strategy could work well, but cannot beat an actual inspection waiver if there is another offer with an inspection waiver and all other qualifications are the same.

Strategy 3: Talk to Your Realtor

As a full-time real estate agent I have seen hundreds of properties and dealt with many transactions on both sides. Realtors attend inspections with their clients when they make a sale (or pre-inspections before they make an offer). We can give good advice about the condition of the property because we are very experienced with properties, but keep in mind that we are not licensed inspectors so we are not allowed to perform inspections. Our advice cannot replace an actual inspection, but can allow buyers to make an educated move.

If you have any questions any properties you want to make an offer on or any real estate-related topic, please don’t hesitate to call me at (617) 453-8372. You are welcome to read my next post about financing contingency to learn out to stand out among bidding wars!