What Can Go Wrong in a Real Estate Deal After a Home Inspection Contingency Has Been Removed or if There's No Home Inspection Contingency?

The primary hurdle after contract ratification between buyer and seller is the home inspection, but even after repairs are agreed on, that doesn't mean that you should completely bank on a closing, whether you're a buyer or a seller. The below aren't far-fetched. In fact, below in red are some examples I've seen in transactions where I've personally represented buyer or seller where a contract either got derailed or that could have derailed a contract that weren't predicated on the home inspection. In black I'll list some other possibilities. I'll start with a doozy that happened the week of closing after the sellers had moved out the weekend before:

1. Buyer Fraud Discovered Week of Closing After Sellers Unstage the Home

A home inspection, an appraisal, well inspection, septic inspection, title search, & termite inspection went fine. Before closing, the sellers, not wanting to take off of work to wait to move after the buyer was clear to close, moved out of a home the weekend before the week of closing. The contract fell through the week we were scheduled to close due to the buyer's financing in light of the buyer's fraud. Apparently they hadn't paid taxes in years, and while I knew their local lender, who had been a lender for decades, somehow he didn't catch it. Based on my recommendation, we struck the release and hold harmless language with the 1st buyer that comes with the release agreement presented to us and eventually terminated without a consummated release based on our contractual right to do so.

The home was now unstaged, with holes in some walls & with sellers who didn't want to do much about those holes, & not in as good of a market season. Eventually, we received a 2nd offer. We attempted to pursue the 1st buyer after receipt of the 2nd offer for performance or the difference, which can work in some cases. However, the attorney we worked with did not seem optimistic about our chances of winning a lawsuit after more details regarding the buyer's financial situation were finally revealed with the threat of a lawsuit from the sellers present. The home eventually sold for approximately 4% less after time and price reductions went by.

2. Major Foundation Work Uncovered Due to Fraudulent Prior Contractor

When the termite/moisture inspection was done, the findings were more than 10% of the value of the home, where the seller discovered that the person who he had previously contracted to do most of that work had done a terrible job and that work would need to be redone, but that original contractor was nowhere to be found, with the seller suspecting that they moved out of state since the job. Without a clear termite/moisture inspection, the seller wouldn't be able to fulfill the contract, and the buyer wouldn't be able to even get a mortgage loan if they had still wanted to move forward due to the wood-destroying insect structural damage.

3. Appraisal Issues

1. The appraisal required substantive repairs to the home (especially when the buyer doesn't have the capital for an escrow holdback, or when the lender doesn't allow an escrow holdback nor a reno loan, and the seller refuses to do anything about it).

2. I don't know how many times I've represented a client where the appraisal was below the contract price, or below the contract price plus the appraisal gap agreed to in advance at time of offer. While sometimes this element can be assisted by an appraisal dispute, and at other times a buyer or seller is willing to come down or meet somewhere in the middle (though more often than not in my experience buyers won't come up at all if not agreed to in advance), in rare cases when the seller won't come down or can't come down due to what they owe without coming out of pocket, it can derail a transaction.

3. The after-repair appraisal was below the after-repair price on a contract with a renovation loan.

4. A short sale that was bank-approved at the list price had an appraisal expire before the bank got around to dealing with it, and the new appraisal was higher than the contract price. Soon after, an attorney told the seller that it would probably be best for her to let it foreclose in light of a unique situation regarding the title.

5. A short sale that was not bank approved at list price had the bank come back after contract ratification with an unreasonable # for an appraisal that didn't factor in at all the discount that it should have because it was a short sale & as such a distressed property that wouldn't be able to command the same value of a comparable property. That said, it's common in these scenarios where a property hasn't been bank-approved yet by the seller's lender for the home inspection to occur after bank approval.

6. The buyer didn't authorize & pay for the appraisal when they were supposed to per the contract, drastically delaying the timeline before the appraisal came back, & refusing to disclose that they had ever been in breach of contract via the delay. Despite being a veteran broker with decades of experience, they likely didn't order until the listing agent (me) asked them about it.

7. While the buyer ordered the appraisal when they were supposed to, the appraiser took more than the 14 days that they are supposed to following that to provide the appraisal report.

4. Title Issues

Examples I've encountered with clients:

1. While the home had been purchased less than 5 years prior and the home was fairly new in a fairly new construction neighborhood, a major title defect was uncovered.

2. The contract fell through due to a title defect that the seller wasn't able to remediate within the time stipulated in the contract

5. Financing Issues

1. The contract fell through after repairs were agreed upon due to the buyer losing the job that they had for years at no fault of the buyer (lay-off).

2. The contract fell through after the buyer shifted their payment structure at their work while maintaining the same job and assuming it would be OK. The seller I represented retained the earnest money deposit but did not opt to pursue the buyer further.

3. After some delays that led to a few rate lock extensions, the bank said that they couldn't do another rate lock extension, and the rate went up on the buyer's loan.

4. The contract fell through after the buyer didn't close on time (nor within the default 10 extra days for financing in the REIN contract) due to financing and the seller I represented had a life circumstance that occurred while under contract that made him no longer want to sell. I had told the seller in advance of us accepting the offer that I had high doubts of the buyer closing on time due to their proposed closing date and the lender taking longer than most in my experience, but the offer still seemed to be the best offer we had when considering other factors. Because I represented the seller, it turned out in our favor & we terminated the contract, as was our right.

Here are some that I've never experienced myself when representing a client directly but that can happen or that I've seen secondhand:

1. I once helped a buyer to buy after the prior buyer for the same home had stated that they were willing to provide an appraisal gap guarantee only to not have the cash for everything that they had promised.

2. Sometimes buyers' financing falls apart when they seek out flood insurance that they didn't know about before making the offer or after they see that the flood insurance that the seller had was far below the cost of flood insurance that they may receive.

3. Sometimes buyers make financial decisions that jeopardize their finances, such as a client of a colleague at my firm who purchased a financed wedding ring that killed a deal.

4. A buyer purchased a home with an adjustable-rate mortgage, and then the rate went up drastically.

6. Survey Issues

A survey performed (which can at times occur after removal of home inspection contingency) revealed encroachment. I've seen survey issues like a driveway encroaching, a wall encroaching, a carport encroaching, and more survey issues. While I haven't personally seen it, and while rare due to adverse possession impacting encroachment in cases of 15+ years in VA, some homes are encroaching. In one case, while I told a buyer that I was concerned about encroachment due to what I saw online and that they should get a survey, and followed up when they were slow to get one, they relied on someone else they knew to order it for them, and that person didn't schedule it until after the home closed, confirming the very encroachment I feared.

7. Non-Disclosed Material Adverse Facts Discovered After Closing

I've represented buyers where, after closing, the buyers discovered that there had been mold issues that had been covered up in the home. In 1 of those cases, even a mold-specific inspection hadn't found it. In each of these cases, where I represented the buyer & not the seller, I advised the new owner to contact an attorney, as I felt that especially 1 of their cases was strong since he had found a witness in the neighborhood (the next door neighbor) who had known that the seller was painting over mold rather than dealing with it appropriately and had previously talked to them about it.

8. Seller Didn't Perform Work as Agreed

The final walk-through inspection by the buyer is an important element of the home-buying process. In some cases, the seller doesn't perform the work as agreed.

I've seen at least a few pretty gross cases of that occurring, including:

1. 1 time in the winter during a long period of very low temperatures where we did the walk-through soon before closing (which was important due to the prospect of pipes freezing) only to find out that much hadn't been done. If that happens, the buyer has the recourse to wait until the seller performs or walk if the seller is unwilling to do what they're contractually obligated to do. In that case, the buyer didn't plan accordingly, with moving scheduled too soon after closing & had nowhere to go supposedly.

2. One time we showed up for the walk-through only to find out that practically nothing had been done by the contractor with the non-occupant seller having no prior knowledge that most of the work hadn't been touched.

3. In one case, the seller wanted to do a repair himself, and countered as such in the repair request. The buyer I represented obliged, but the pictures that the listing agent sent the buyer's agent were deceiving. The sink that had been "repaired" from a minor leak shifted to a major leak due to the seller's bad repair job prior to closing, going through the floor to the next floor.

9. Insurance Issues

The insurance company flagged items that required work before they would insure the house.

10. Condo/Home Owner's Association

The buyer I represented walked due to the Home Owner's Association contingency & the rental cap present after their job shifted during the contract to make an in-person return back to work in another area more likely.

Example I may have encountered with a buyer:

The contract stipulated that the seller agree in advance to up to 1% of the purchase price in HOA violations, and those violations ended up exceeding that cap.

11. System in Home Breaks & Requires Replacement After Home Inspection

1. A water heater that worked fine during the home inspection was one I flagged (representing the buyer) at the walk-through inspection as no longer working.

12. Agent Misunderstands Contract

1. There have been at least a few times where I represented a seller, the buyer thought that the buyer was protected by an inspection contingency that was other than the home inspection, but they weren't. For instance, in one case, a buyer's agent who typically used REIN offers (typical in Hampton Roads) didn't realize that the VAR contract (typical outside of Hampton Roads in much of VA) she was using didn't include a moisture inspection which she was banking on due to moisture issues that she was confident that the home had.

2. I've even seen where I represented a buyer and the listing agent got the moisture inspection despite it not being required likely due to a misunderstanding of a VAR contract that she likely wasn't very familiar with.

3. I've seen where a listing agent didn't notice that we added a lead well water inspection & didn't acquire one until I called it out as the buyer's agent once we got the other well water inspection back.

4. A buyer's agent who didn't live in Hampton Roads & who was unfamiliar with REIN offers provided a clear home inspection contingency removal addendum following the home inspection. Soon after, the chimney inspection report that they had performed came back, and they stated that they wanted substantive concessions that would likely cost >1% of the purchase price. I informed the seller that he was not contractually obligated to do anything and that the buyer had no viable recourse to walk at the time, and the seller did nothing, while the buyer was required to close with no contingencies to escape through.

Situations I haven't encountered myself but that happen often:

1. Often agents unfamiliar with VAR contracts don't understand that without an additional provision added into the contract, the buyer, if they acquire a conventional loan, is responsible for covering out of pocket any appraisal gap between the contract price and the appraised value.

13. A Party Gets Ill

Around the start of Covid-19 hitting the US and many people contracting it, Covid-19's impact on transactions was so prevalent that a form was developed for it to help a transaction still come to closing by adding in provisions for delays in the event of someone getting Covid-19. It wasn't that unusual, however, for agents on the other side of a transaction who didn't use the form routinely to take one glance at it and think that it did the opposite, merely "providing an out" if someone contracted Covid-19.

I once contracted Covid-19 myself during a transaction, but rather than it delaying things in that case, it simply meant that I provided another experienced agent to fill in for me at a walk-through inspection & that I was available by call but not in person for the closing. That said, while I can often provide an agent with more experience than me, & did so in this case for the walk-through inspection, I have a high opinion of my own abilities, and the buyer was not impressed with the agent.

Other Contingencies

There are numerous other contingencies that can kill a contract. Here are some examples:

1. 1st right of refusal (aka a kick out clause) triggered from superior 2nd offer

2. The court doesn't approve when a home requires court approval

Destruction of Home on Home I Showed

I've come to a nice home in a nice neighborhood with a buyer I represented. The home was flooding from frozen pipes that burst soon after a snow. We were the first people to discover it and it was so bad that I could hear the flooding before I could see it in the house. I wouldn't be surprised if the flooding either totaled the home or required hundreds of thousands of dollars to remediate.

Properties can also be damaged or destroyed by hurricanes, fires, and a number of other natural elements.

In addition to natural elements, people can destroy homes. I've seen it, where a property that was fine was vandalized to the point of being condemned.

Change in Status of Buyer or Seller

There are a number of things that can happen to the buyer or the seller. Here are some examples that can complicate things if you're trying to buy or sell:

1. One party dies. Even if in a state where their estate is still obligated to proceed with the purchase, that can get complicated if they don't have a will or if they have a negative net worth that won't be forgiven upon death. Even if legally required, some sellers would prefer not to force a buyer's estate to do that.

2. One party goes bankrupt

Disagreement Among 1 Side

I've almost listed property, & would have listed the home if all heirs were on board, but one of the probate heirs didn't want to sign anything, so the property went into foreclosure. Something similar could happen even if a home is already listed if there's a dispute between heirs.

Buyer or Seller Gets Cold Feet

Sometimes buyers get cold feet and would prefer to surrender their earnest money deposit and potentially pay out even more if the seller decides to go after them (as long as the contract doesn't limit the buyer's liability to the earnest money deposit - while some contracts do, typical REIN & VAR contracts in SE VA don't).

Likewise, some sellers can even get cold feet, especially if they have a major change in life circumstances (i.e. the stock market crashes on the few stocks they hold that makes up most of their retirement). In this case, it's best to involve an attorney if you as a buyer want to pursue a sale, as you may be able to force performance or receive substantial compensation.

With all of the above in mind, I hope that you're not scared or anxious, but I hope that you're also not so comfortable with passing the home inspection that you assume it'll be smooth sailing from there.

Related:

• SE VA House Seller Guide

• What Adam Offers Sellers

• SE VA House Buyer Guide

• What Adam Offers Buyers