Q: We are about to sign a contract to buy our first house. Our real estate agent has given us the name of a home inspector and has advised us to use the "specific inspection contingency" clause in the contract instead of the "general." Can you explain the difference between these two concepts?
A: You have raised two important real estate consumer questions: What is the best kind of contingency clause to use in a contract, and should you use an inspector recommended by an agent.
In my opinion, every prospective home buyer should have the property inspected by a professional inspection company. The real estate contract should make the entire purchase contingent on a satisfactory inspection. This is known as an "inspection contingency."
Buyers often sign real estate contracts based on emotions and excitement, rather than facts. A home inspection, conducted several days after the contract is signed, should bring the buyer back to reality.
You should include the following language as an addendum to your sales contract:
"This contract is completely contingent upon the purchaser obtaining, at purchaser's expense, a satisfactory home inspection from a professional home inspection company. If purchaser is not satisfied for any reason, and advises the seller within five business days from the date the sales contract was ratified, this contract shall be null and void and the earnest money deposit shall be immediately returned to purchaser. If purchaser does not act on this contingency within five business days, this contingency shall be automatically removed."
This is known as a "general inspection contingency." Basically, if the buyer for any reason does not like the results of the inspection, the buyer can terminate the contract and the earnest money deposit will be refunded to the buyer. Many buyers are adding language in their purchase and sales contract to the effect that their deposit check will not be cashed until after the inspection contingency has been removed.
The contingency recommended by the broker--the "specific inspection contingency"--is much more limited. Although different contract forms contain variations on the theme, the thrust of a specific contingency is that if the buyer finds defects in the house, the buyer will give the seller three days to agree to make the repairs. After the seller responds, the buyer has one or two additional days to decide whether to accept what the seller is prepared to do, or to terminate the contract.
I oppose the specific inspection contingency because I believe it is unfavorable to both buyers and sellers. From the buyer's point of view, if the house is structurally sound, but the roof, for example, has a short useful life remaining, the buyer may not want to complete the transaction faced with a large expenditure two or three years down the road.
At first reading, the specific contingency appears to favor the seller because it does not permit the buyer to terminate the contract for any reason. However, my experience is that when a buyer wants out, it sometimes is better to terminate the contract at this early point rather than have hassles all the way to settlement.
It should be noted that in recent months, most real estate agents and brokers have begun using a form titled "Regional Sales Contract." This form, although not perfect, has a contingency addendum that merges both the general and the specific. It gives the purchaser the option to terminate the entire contract or to ask the seller to make certain repairs. If the seller does not agree to all of the requested repairs, the buyer still has the option to cancel the contract.
You also said that your real estate agent has suggested the name of a home inspector. My first question is whether that agent is really "your" agent or is the seller's agent. I have encountered too many purchasers who mistakenly believe that the agent is representing their interests, when in fact the agent is working for, and getting paid by, the seller.
In any event, I believe agents should give you the names of two or three inspectors and let you make your own decision. One inspector may get a lot of business from a particular real estate broker, and may not want to "lose the deal" for that broker should they be too harsh in their evaluation of the house.
Make sure that your inspector is a member in good standing in American Society of Home Inspectors.
Finally, you should ask the inspector--before you engage him--about the extent of his liability for any mistake made in an inspection. Many inspectors specifically limit their liability to the cost of the inspection. Clearly, if the inspector missed the fact that the electrical system was not up to code, and the cost of correcting the situation is several hundred dollars more than the cost of the inspection, you may be considerably out of pocket.
Unfortunately, many home buyers are not informed of this limitation on liability until they receive the written report from the inspector--at which point it is too late to find another inspector.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.