Sometimes, the realities of trying to buy a property can be harsh. Your dreams can turn to dust when the building inspector’s report reveals the home you’ve fallen in love with is prone to flooding, or has termites, mould, rising damp or rotting foundations.
And now you face a dilemma: do you return to the negotiation table to ask the seller for a reduction on the agreed price to cover the remedial work, or do you walk away?
If spinning on your heel is the option that appeals in this scenario, then pause for a moment.
You’ve already paid your earnest money – a deposit of 2-3% of the property’s value. So, are you sure you can back out and get your cash returned even after signing a contract of sale?
If you’re using a reputable agent and a good lawyer, you should have no problem. But your ability to drop the deal – even though the home has real problems – is determined not by what you think is right but what is written in the contract.
As an experienced local real estate agent, I deal with contract of sale issues regularly. Like any other agreement, it has to protect your interests and be water-tight.
While your deposit will be held in an escrow account administered by a third party, the last thing you want is a fight over whether the contract allows for a return of your deposit because of a detrimental building inspection.
The scenario painted here is unusual but not unique. To help you prepare for any issues around a critical inspection, or the contract of sale in general, I have listed some key points to help you avoid a bad deal.
- Use contingency clauses – In your contract of sale, you can make the sale contingent on several issues that concern you. For example, it should be evident in the paperwork that your deal is contingent on issue-free inspections.
- Time limits – It’s okay for you to make declarations of what you’ll accept or not, but the seller will likely insist on a deadline for an inspection to be held. Their reasoning is to make sure their property is not taken off the market for an extended period. In this scenario, your inspection report must be filed within the time allowed; usually seven to ten days of the contract of sale being signed.
- Missed deadlines – If you do miss deadlines specified by the seller, you may be able to back out of the contract, but you’ll probably lose your deposit.
- Inspection expected – A bank or lender will insist on a building inspection taking place. If you do it outside of the timeline agreed and the report is negative, your lender may back out and leave you holding the contract and requiring a new source of finance.
- No conspiracy – Where a report is negative, you’ll find the seller and their agent are often genuinely surprised. Many owners would not necessarily know all the issues with their property, so, please don’t assume they’re trying to con you. Give them the opportunity to suggest a solution.
- Don’t be vague – Some contracts will often state a contingency as the discovery of “major adverse conditions”. That risks an argument about the definition of such a phrase. Works with your lawyer and agent to ensure each contingency in the contract of sale is worded clearly and will avoid a dispute over its interpretation.
- Post-close issues – These occur in cases where the buyer has not conducted an inspection and usually rushed through the deal for fear they’ll lose the property to another party. If you’ve closed on a deal but then find a big issue with your new home, you may have legal recourse. But instead of handing back the home, you’ll be in court fighting for compensation from the seller’s for “failure to disclose”. That can get expensive and ugly.