How to back out of the deal after a bad home inspection

For most people, a home is the biggest financial commitment you’ll ever make. So it makes sense that you’d want to be sure before signing your name on the closing papers. There are a lot of considerations to take into account before closing on a house and if something goes awry — like receiving a bad inspection report — you need to make sure you’re in line to protect your investment.

Yes, you can back out of a home purchase after a bad inspection, but it’s important to know when to walk away. In a seller’s market, you may struggle to find a home in your budget you like as much as this one. Walking away means you’re moving on from that house for good — so you need to decide how bad is too bad when it comes to an inspection report.

How do you do that? We’re here to guide you. In this piece, we’ll discuss some of the major red flags to look for on an inspection report and help you decide what is and isn’t worth walking away over. Plus, we’ll also help you figure out how to start the process of backing out of a home purchase.

Want to walk away? You’ll want an inspection contingency

Yes, you can walk away from a home purchase before closing. But it’s a lot easier if you make sure to secure an inspection contingency when you put down any earnest money on the home. You won’t know what’s really going on with the condition of the house until an expert has gone through and inspected it, so you need to have an out in case of a bad inspection.

The good news? Unless the seller demands you waive the contingency as a condition of accepting your offer, a home inspection contingency is standard. This contingency allows a buyer to request repairs or credits to fix any issues found during the inspection, or back out of the purchase entirely. This is a big reason why home inspections are so important. 

Most contingencies, however, come with a deadline of seven to ten days, so you need to make sure you’re ready to make some quick decisions after an inspection.

When to walk away after a home inspection

A home inspection will investigate all of the readily accessible parts of your potential new home, from the roof to the foundation. Chances are, there will be a couple of things that might need maintenance. That’s normal, and you can usually negotiate with the seller to have them fix things or lower the home price. (Here's what fixes are mandatory after an inspection.)

That said, there are some inspection notes that constitute major red flags.

Foundation issues

The foundation is literally holding up your home. It’s the structural base on which your house stands. As such, it’s not exactly an easy thing to fix nor is it an easy one to inspect. 

A typical home inspection will examine the outside of the foundation and if an inspector thinks the home may be at structural risk, they will recommend a more exhaustive inspection which could cost up to $500. Repairing a faulty foundation could cost tens of thousands of dollars depending on the extent of the damage.

Consult with a structural engineer for a quote to figure out what the real cost of replacing the foundation will be. It could be enough to justify walking away.

Learn more about buying a house with foundation issues

Termites

Termites are one of the worst things that an inspection can find. They’re most common in older homes in the southern U.S. If there’s evidence of termite damage on an initial inspection, you’ll need to order a termite inspection which can determine the scope of the damage and whether or not the termites are still present.

Termites can cause considerable damage quickly and repairs can cost in the thousands of dollars. Worse yet, they could always come back even after extermination.

Water damage

Water damage isn’t necessarily a reason to back out of a home purchase. Some damage is easy and inexpensive to fix. But if there’s mold behind the water damage, that may be a bigger issue.

You’ll need to pay a professional to make a special investigation of water damage and any mold related to the damage. It’s imperative to your health that you remove mold but it can cost a few thousand dollars to do. Plus, water damage may also indicate issues with the plumbing or that there are soft areas in the walls or floors which may lead to even more costs.

Roof problems

A roof is much better over your head rather than falling on top of your head. And, as you might expect, replacing a roof is not cheap. Roofs require somewhat frequent maintenance and there are a number of issues that a home inspection might reveal about the roof.

If an inspector recommends replacing the roof, you should get the seller to lower the price, pay to fix the roof themselves, or walk away.

Unpermitted work

Whenever you have work done in your home, you need to get the proper permits. Permits help ensure that work on a new addition or renovation is up to code and meets safety standards. Unfortunately, permits cost money — so sometimes people don’t get the proper permits when doing work on their home.

The inspection might raise some concerns about work that looks shoddy. You’ll find a record of permits in the city clerk’s office. If there’s evidence that the previous owners did unpermitted work, you may be on the hook to pay to get the work up to code. Otherwise, the city can hit you with fines or prevent you from doing more work on the home in the future. You may find that’s not worth the headache.

Title issues

During the closing process, in addition to a home inspection, you’ll also pay for a title search. This process ensures that there are no previous claims of ownership or liens on the property. Most of the time, this is just a formality but if the title search does turn up any issues, that can be a big issue. 

First, a seller won’t be able to legally sell the property without clearing up the issue. Second, if the property is unknowingly sold despite a title dispute, you could lose the property if someone comes forward with a legitimate claim. In this situation, you’d be out of a house and the money you’ve already spent on the house.

How to back out of a home purchase

This all goes back to the first section of this piece. When you deliver the earnest money for your offer, the inspection contingency will lay out the conditions in which you can exit the contract and get your earnest money back.

Most issues that arise from a bad inspection are negotiable. Once the inspection is complete, you can bring the inspection report to the seller and ask that they pay to fix anything or lower the asking price. Of course, the seller isn’t obligated to do so, especially if they have other potential offers to consider. You’ll have to decide how much patience and risk tolerance is right for you. If you’re really in love with a house, you might be willing to accept some more expensive flaws. But don’t forget that you do have the right to walk away if those flaws keep adding up. 

Not every situation is cut and dry. If you and the seller can’t agree on who pays for fixing the house, you might want to back out and they demand to keep your earnest money for the time you spent negotiating. This is why it’s important to have an attorney during any real estate transaction. By invoking the inspection contingency, you should get your earnest money back, but the seller also has a right to sue to recoup the earnest money. An attorney can advise you of the best course of action by weighing all of the potential outcomes.

A buyer has the right to back out after a home inspection. You may even be able to do it without losing any money. But in a seller’s market, the deck is often stacked against you and you may not find another house in your price range that you like as much any time soon. 

When it comes to bad inspections, you have to decide how much risk and additional investment you’re comfortable with for a house you love, and gauge your appetite for negotiating with the seller. Now, at least, you’ll have a better idea of when to walk away.