Subject To Inspection Contingency Clause Can Save Your Investment

By on November 14, 2013

When you are making lowball offers to purchase someone else’s property, you want to stay away from ”subject to” clauses as much as you can. If you do include such a clause in your deal, the seller will have a wide open back door to get out of the deal by exercising the clause because of some weird sudden discovery. A “subject to” clause basically states that a deal will happen at a particular price unless certain conditions are not met. These conditions can include the buyer finding an alternative place to stay within a given date, and in some cases, the approval of a lender to finance the deal.

There is however, a clause that you should include in all your purchases or offers. And that is the “subject to inspection” clause. This is a concrete escape clause you can use when big ticket problems are discovered during the course of completing the deal. It is a simple and effective insurance for your property investing activities.

subject to inspectionA month ago, I accompanied a friend to make an offer for an apartment for about $600,000. She had been able to inspect the property twice beforehand and was fully ready to close the deal. And on this third visit, it was raining cats and dogs in the neighbourhood. It was only then where a seeping corner of a wall in the master bedroom became painfully obvious. On questing, the seller denied any knowledge of the water seepage. The selling agent used the now famous phrase “I don’t know”. You would think that an agent hired for thousands of dollars to be an expert in properties would know. I wonder how these people sleep at night withholding such material information of their properties.

After talking to contractors, it was learned that it would costs about $20,000 to repair it. And there’s no guarantee that the problem will not come back in future. The seller refused to play any part in repairing the miserable wall and refused a conditional clause as well. The deal was called off. If the offer was made without such a clause without having discovered the wall issue, we are looking at a loss immediately on purchase.

About 6 months ago, I got involved with an acquaintance on buying a $12,500,000 house. Yes that’s not a typo. It’s twelve and a halve million. The offer was made and accepted by the seller. When the deal was structured, nobody gave a thought on the “subject to inspection” clause. But thank heavens that the agent was prudent enough in include it in the papers. Because a week later, on inspection by a professional, it was discovered that the property had serious sewage issues. This seller on the other hand, did not deny the problem like the one mentioned previously. He graciously offered to fully repair the problems before completion so that everyone involved in the deal can sleep better at night. What do you think would have happened if there was no such clause in the first place? Who knows?

The key takeaway you have to take note here is that as an investor, you have to always be prepared for the worst and have ready remedies if these turn of events really occur. Always include it in your offers so that you can walk away from a deal or use it as a basis to renegotiate the purchase terms.

The big problem we have is that agents who just want to see a quick deal or working favourably towards the seller will want to exclude these clauses from agreements as much as humanely possible. In fact, I have run into more agents that I can count who flat out decline any deals that include a “subject to inspection” clause. I don’t know how these guys think. But if they need to resort to hiding material information on property defects to sell a house, they should really get out of the industry and look for a real job that champions deception. Hiding material information for huge transactions concerning property can really make a buyer’s life miserable. The negative effects compound when victims of these transactions are genuine home buyers who are too inexperienced to identify these selling tactics. An experienced investor will be able to smell this immediately.

If a selling agent tells you that the purchase agreement is a standardized template that cannot be amended. Go talk to your lawyer. One way or another, you can insert the clause into the contract, perhaps as an addendum.

Also note that real estate agents representing sellers are probably are probably doing this in a sellers market. Sellers hold all the power in these markets and can still sell their homes by straight out refusing to deal with half the interested parties. But when the tide turns to a buyers market, agent behaviour might swing to the buyers favour.

As an investor, you must use this clause no matter what to protect your own interest. If a seller refuses, walk away. There will be others who will agree. You are not emotionally attached to any one property and have a wide variety of options. Remember that “subject to” clauses are for protection. Do not abuse it.



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