How to Back Out of Buying After a Home Inspection Goes Wrong

So, you got the home inspection report back for your supposed dream home — and things are not looking too hot. There are signs of flooding in the basement and extensive termite damage. It’s enough to make you want to run screaming and start the entire home search over, especially if the seller refuses to pay for the repairs.

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“It’s the biggest speed bump in a transaction that’s always the one that, whether you’re a buyer or a seller, you’re hoping to get past… and it’s usually very smooth sailing from there,” says Alan Daniels, a real estate agent who ranks in the top 1% of Colorado Springs agents.

But when is it acceptable to back out of your offer after a home inspection? We spoke with top agents and inspectors about when you can pull out — no questions asked. Here are five hypothetical situations you may encounter when trying to back out of your offer after the home inspection.

Use a home inspection contingency to protect yourself

Once you make an offer on the home, you’ll have to pay some earnest money upfront (typically 1% to 2% of the purchase price) to show the seller you’re serious about making this purchase, and you’ll also sign a legally binding purchase contract with the seller stating you’ll buy the home if all goes according to plan.

This contract should almost always include an inspection contingency, which allows the buyer to request repairs or credits to any issues found during the inspection — or to cancel the deal entirely.

But this contingency comes with a deadline (typically 7 to 10 days), so buyers need to pay attention to timing to assure they’re protected from any damages if they terminate the contract. That’s why it’s important to hire a top-notch buyer’s agent to help you stay on top of things and link you with a quality inspector who will spend hours on a thorough inspection.

In fact, 95% of purchased homes go through an inspection — it’s a requirement for many mortgage loans — so it’s important to follow suit and get a home inspection to protect yourself and your milestone purchase. Although in a seller’s market, it may be tempting to waive the inspection contingency to appear as the better offer, you could be putting yourself at serious risk.

That’s why Tracey Litt of Litt Home Inspection has been seeing more pre-offer inspections done in the Greater Boston Area. That way buyers can get the inspection they need while still waiving the contingency — though they risk their offer not being accepted but still paying for the inspection.

If you do find something terribly wrong or extensive damage you don’t want to pay for, you might be worried that your earnest money is gone for good if you decide to pull out of the contract. That’s not necessarily the case. Let’s walk through some scenarios:

Example #1: The no-brainer

Let’s say you do exactly what you’re supposed to: the purchase agreement includes an inspection contingency, the earnest money has been paid, and the inspection has been ordered and completed in time.

But during the inspection, the inspector finds some major issues indicating foundation problems. To be safe, you order additional inspections for mold and plumbing and discover that the home does have mold and will need a new sewer main. Yikes!

“Often people don’t know what’s going on in their house,” Litt says.

“I find that sellers and listing agents can be just as surprised [by] the stuff that comes up.”

You go back to the seller asking them to pay for the necessary repairs to remove the mold and replace the sewer. They refuse, so naturally, you decide to back out before the inspection contingency period is over.

In this scenario, the seller must return the buyer’s earnest money and has no recourse to sue the buyer for backing out — this is a completely legal move, according to Daniels.

“If the inspection doesn’t come to terms, then it terminates at that non-resolution date, and the buyer gets their earnest deposit back,” he says.

Example #2: The cash buyer

If you’re a cash buyer, you don’t actually have to get an inspection on the house — there’s no lender involved, so it’s entirely your decision.

“It’s still recommended that the cash buyer at least gets a general overview of the major components of the home,” Daniels says.

So a smart cash buyer will still want to make sure their investment is up to standard. Suppose you’re a cash buyer who hires an inspector who finds, say, extensive termite damage that you’re not up to pay for.

As long as you’re within the timeframe of the inspection contingency, you can still pull out of the purchase contract and get your earnest money back — no questions asked.

Example #3: The seller’s market

Let’s say it’s currently a seller’s market. To make your offer more competitive, you add a contingency that says you’ll take on any of the costs for repairs found during the inspection. But during the inspection, you learn of a heinous pest infestation that you don’t want to pay to repair.

According to Daniels, you may still be able to pull out of the contract… as long as you worded the contingency correctly. Basically, the contingency should state that you’ll buy the house as-is, but also that if there are any major adverse conditions, you won’t be moving forward. You’ll probably want to outline the deal-breakers in the inspection contingency so that everyone is clear about what will be considered a “major adverse condition.” “So just take some of that competitiveness out of it a little bit,” Daniels says.

The seller will probably be upset, but you can still get your earnest money back — as long as you’re within the inspection contingency deadline.

Example #4: The late arrival

Uh-oh. You’ve waited past the inspection deadline, but you still want to back out.

You can likely get out of your purchase contract, but you’re not likely to get your earnest money back, and the seller may decide to sue you for breach of contract — but this honestly isn’t likely, as it is very difficult for a seller to list and sell a house that’s part of a lawsuit as long as that lawsuit is ongoing.

However, Daniels notes it could be possible to get your earnest money back with other contingencies in the contract.

For example, if the insurance doesn’t work out, or a loan falls through, you can often get your deposit back thanks to an insurance contingency or financing contingency.

As long as you have the right contract contingencies, and a good agent who knows the dates in and out and is protecting you the whole way through, the odds of losing your earnest money deposit are low.

Example #5: The hidden problem

There’s a Seller Disclosure that sellers have to give buyers, which discloses all of the known issues with the house and protects the buyer in advance of the sale. But if the inspector finds an issue with the home — for example, a leak the seller swore was fixed, or something buried under the home — and you have evidence that the seller concealed it or deliberately excluded it from the disclosure, you can back out of the deal.

If you’re inside the inspection contingency deadline, you can back out of the deal and get your earnest money back. But in this scenario, even if you’re outside the deadline, you could have an actionable case to sue and should talk to a lawyer, says Daniels.

Typically, the seller will be in the wrong for not disclosing information, so you should be able to get your earnest money returned.

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Bonus example: What happens if you find a big problem after closing?

In a fast seller’s market, Litt is seeing more and more buyers forgoing the home inspection for a more competitive purchasing contract — which she does not recommend doing under any circumstance. But she does still recommend getting an inspection after closing, to assure that there aren’t any major damages to be aware of.

“Last year, I had people calling me to do post-closing inspections, which I call, ‘Hey, let’s see what you bought!’ — and a couple of those did not go too well,” Litt says. “I had one woman crying because of it. In one of them, I found a buried oil tank, which can have catastrophic environmental implications and can cost tens of thousands of dollars to remediate.”

But if you find yourself in this situation, especially if the information wasn’t disclosed by the seller or the inspector failed to notice a major issue, you could have another legal case on your hands. In this scenario, Daniels recommends immediately seeking legal advice to see if you can get these damages covered.

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