When an investor buys a home, they need confidence that what they see is what they get. To help make that happen, it is common for investors to use a physical inspection contingency in the language of the agreement. Whether you are a Self-Directed IRA investor or not, it is important to know exactly what this is—and how home buyers use it to protect themselves.
What is a Physical Inspection Contingency?
The first thing to know is that a contingency is a condition added to the purchase agreement. This means that if the home in question does not live up to a specific contingency—say, if the roof is in poor shape after the inspection—then the purchase will not have to go through. A physical inspection contingency gives the buyer the ability to inspect the property. After performing this inspection, they can then choose whether or not they want to proceed with the agreement.
Why is this relevant? As Fox Business recently reported, this contingency works in a normal market by making sure a house meets a buyer’s criteria. The buyer gets to determine the standards of the inspection and can then choose to disapprove the state of the house, thereby withdrawing from the purchase agreement. This makes sense; after all, it is the buyer who is putting up a lot of money. They need to be confident that the purchase they are making is going to be well worth it.
Issues with Physical Inspection Contingencies
One problem? Many buyers can use a physical inspection contingency to back out on a deal. And when the real estate market is in high demand, sellers often get to call the shots—they can choose from offers that wipe away contingencies. This puts the seller in a powerful negotiating position—and makes it difficult on buyers.
In other words, because there are so many sellers and fewer buyers, relatively speaking, it puts sellers in the driver’s seat.
That can put the pressure on buyers. But for many buyers, it is still vital to include this contingency. If a seller is in such a prime position that they will not include it, it means that home buyers are at a disadvantage.
As Fox Business notes, “The seller, of course, is under an obligation to reveal and disclose to you everything he knows, but there may be defects that are even unknown to him, and so, if you wish to have a full understanding of the property, relying on a disclosure statement itself is not sufficient.”
This means that the seller does have to disclose what they know about the property. But assuming they do so honestly, there still may be problems with the property.
Being Careful in Real Estate Buying
What does all of this mean? Investors have to be very careful about how they build a purchase agreement. For example, one detail is how quickly a buyer has to perform the inspection and make a final decision. This is something every buyer should know going into the purchase.
These are also the types of questions that real estate investors constantly have to think about. And its why investment experience can be so important. Investors have to be aware of issues like physical inspection contingencies. And that is why we encourage investors to do their due diligence. After all, a Self-Directed IRA means that investors are making their own decisions. This is good for experienced investors. But new investors have to be careful about being meticulous in the details. After all, a Self-Directed IRA puts the investor in charge.