Understanding Termination Options And Inspections

Dated: 04/04/2018

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"The house won't pass inspection."  You've probably all heard a statement similar to this.  But, is that really the way it works?

It is, if you add two words:  "the Appraiser's".  "The house won't pass the Appraiser's inspection.    

But, when referring to a home's general home inspection that is conducted by a licensed home inspector, there is no "pass" or fail".

People do confuse the terms "appraisal" and "inspection", with some people thinking they are the same.  They aren't.  Just like how an "appraisal" required by a lender to determine market value on a property so that they know how much they will loan on it, and the county appraisal district  has "appraisal" in its name but actually uses an "assessment" to determine the value at which they will base taxes.   These two uses of the word appraisal are different.  Similar, maybe at times, but definitely different.

Now, back to inspections.  A buyer pays a seller a Termination Option fee for a number of days after contract execution to ensure that they get the option to terminate for any reason.  One of the reasons could be due to inspection results.  When a buyer signs a 1-4 Family Residential Contract, they are agreeing to accept the property as it is on the day of signing.  What the Termination Option (or Option Period) does is that it allows the buyer to conduct inspections on the structural, mechanical, electrical, plumbing, and other components of the house.  The approach buyers take to dealing with the results of the inspections is this:  "When I signed the Contract, it was based on what I knew about the property on that day.  Now that I have inspections that show deficiencies that I wasn't aware of on the day I signed the contract, I want to now renegotiate, (or terminate)."

The property can't "pass" or "fail" because it is relative to what issues cause concern to one buyer vs. another buyer.   An inspection may show that the hot water heater is near the end of its useful life.  To one buyer, this may be thought of as, "The hot water heater didn't pass inspection."  But, that's their way of stating, "I'm not buying this property with this hot water heater."  Sellers in Texas are selling their property "as-is", and don't have to make any repairs during the Option Period.  They don't have to even change a light bulb if they don't choose to.   Buyers have to decide if they want to renegotiate and ask for certain repairs to be made, if they want to adjust the terms of the sales price or seller's contribution to buyer's expenses instead of the seller physically making any repairs, or if the buyers  want to terminate the contract.

Lenders don't typically order appraisals until after the Option Period has ended and the Buyer has agreed to move forward with the purchase.  Depending on what type of loan the buyer is getting, the Appraiser will be inspecting the home to make sure it meets the lenders requirements.  In this situation, it could be said that a home didn't "pass" inspection, but what is a more accurate statement is that the property "did not meet lender's requirements".  If the seller wants to sell to this buyer, then they must complete the lender required repairs.  

A conventional type loan is the least strict when it comes to lender required repairs, not to say that there aren't any because there are.   

An FHA or VA loan's property condition requirements have mostly to do with safety and livability.  Some examples of condition issues that won't "pass" FHA or VA loan requirements on an appraisal are broken windows, wood rot, missing flooring, non-working HVAC, missing stove or non-working parts on the stove.  If a Realtor says this home "won't go FHA", it means that they already know that there are issues with the property that the seller isn't willing or able to repair so that the home would be approved for an FHA loan.


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Sherry Hamm

Sherry Hamm obtained her Texas Real Estate License in 1999. Sherry is a devoted full time residential Real Estate Professional focusing primarily on Houston's Westside, Katy, Northwest/Southwest Harri....

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