Would the seller be justified in keeping the earnest money if a buyer backed out of a contract based on an inspection that did not reveal such major problems but merely the purported need for minor repairs that the seller was not willing to do at the contracted selling price?
A: Good question. We’ve often wondered the same thing.
Back when Sam started his career as a real estate attorney, it seemed that buyers were focused on making sure that things that were actually broken were fixed by a seller. Now it seems that buyers often ask sellers to not only fix things that are broken but want many items (like appliances) to be new.
Forty years ago, professional home inspections were different from what buyers today experience. Back then, a home inspector walked around a home with a checklist and would note things that were wrong with the property. At the end of the inspection, the home inspector would hand the report to the buyer and keep a carbon copy of it. (Yes, back then inspectors used carbon copy paper for their reports.)
Inspectors didn’t use infrared cameras, digital cameras, humidity sensors, radon detectors, lead based paint detectors or any other similar testing devices. Those technologies didn’t exist. Inspectors simply used their eyes and years of experience to assess potential problems.
While home inspectors still use their eyes and years of experience, they (and their clients) also benefit from new technology to assist them in their home inspections. Today, most home inspectors don’t deliver a report at the end of the inspection. Instead, they go back to their offices and prepare a report that is full of notes, qualifications, observations, pictures and even videos. Many of the reports that Sam sees in his practice are quite detailed and are helpful to home buyers.
But the more detailed the inspection, the more items that surface as potential problems. The typical inspection report might note dozens of deficiencies. The buyer then needs to decide what to do with that information. Some real estate contracts might limit the home inspection clause to “major mechanical” issues and specifically exclude cosmetic or even routine items from the home inspection. And, yet, home buyers often request that the seller fix all of the items in the report or provide a cash credit for the home’s deficiencies.
We don’t know why buyers feel they have a right to ask for all of these items. Perhaps when home buyers receive the home inspection report and they realize all the possible or actual problems the property has, they feel the seller should take care of all of these issues. It’s also possible that years of watching TV shows about buying properties and fixing up homes has given viewers an unrealistic perspective of how “perfect” or “like new” their new property should be.
As with many things in real estate, we also think that these issues are market driven. As the housing market has picked up pace, sellers are less likely to agree to repair items listed in the inspection report when there are multiple other buyers willing to swoop in and purchase the home in “as is” condition.
Likewise, when buyers know that sellers have multiple offers, many buyers will limit their request to only significant deficiencies in a home, or do away with the home inspection contingency altogether.
What can buyers and sellers expect going forward? Well, when buyers look for a used car, or a used item on an online marketplace, they either pay for the item in the condition it is in, take a pass or ask for a reduced price because of the condition. In residential real estate transactions, buyers will usually negotiate a price for the home and then inspect the home. This scenario gives buyers a chance to cool down after price negotiations, which are emotionally draining, take a second look at the home, and then make requests of the seller based on the inspection report.
Sam’s perception is that once the buyers have the inspection report, they feel justified in asking that all of the items listed should be repaired or replaced. And, he has noted that buyers don’t tend to care whether the item in the report is noted as broken or beyond its useful life. The buyers simply want to move in and not have to deal with any issues relating to the home. (This is also why existing home warranties have become a much bigger business over the past decade or two.)
First-time home buyers are often the most insistent that inspection report items get fixed, perhaps because it’s taking every last cent for them to be able to buy homes at today’s higher prices. Sam sees many second- and third-time buyers willing to let the small things go and focus on the big picture items. But over the years, he has noticed that even more experienced or older buyers will ask the sellers to fix even the smallest of items and want a credit for older appliances and fixtures that are noted by inspectors as being beyond their “useful” life.
It’s the “I’m paying all this money and I deserve a new [fill in the blank]” attitude that’s tough to swallow.
The only way this attitude will change is when sellers simply refuse to make any of the repairs that buyers request, cancel their contracts and move onto the next buyer. This pushback is happening in the hottest markets. But at the end of the day, most markets aren’t that hot, and most sellers just want to close and are willing to negotiate a bit further to get the deal done.
We suppose buyers could pay for an inspection before negotiating the price, but most buyers wouldn’t be willing to shoulder the cost of multiple inspections. So, the status quo means buyers, sellers, agents and real estate attorneys (in states that use them) will continue to negotiate inspection items for now.
As for keeping the earnest money, as long as the inspection falls within the contingency period, the buyers have the right to walk away from the deal if they and the sellers fail to reach a deal over inspection items, taking their earnest money with them. Once the contingency period expires, the seller might technically be able to keep the earnest money, depending on the language in the contract.
As a final thought, if there’s a real issue that’s uncovered in the inspection that the seller refuses to fix (say, a crack in the foundation) and the buyers walk away, the sellers must now disclose that material issue in the seller disclosure form, which might ultimately change how the property is perceived and the price that is ultimately paid.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (Fourth Edition). She is also the chief executive of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.
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