To gain an upper hand in today’s competitive housing market, homebuyers have been waiving their home inspections — or at least their right to back out of a deal because of an inspector’s findings. Though this practice, known as waiving your inspection contingency, can help you win a bidding war, it comes with some serious risks.
Now, home insurance company Hippo is offering a new pseudo-insurance product that may give buyers the best of both worlds: a contingency-free offer and less risk — at least slightly.
Known as Inspection Protection, the product lets buyers waive the contingency, get the home inspected and add a layer of protection against some of the more costly issues that might crop up down the line.
Sellers can also add the coverage and pass it on to buyers. According to the company, homebuyers in a pilot program were four times more likely to waive the inspection contingency when sellers bought this coverage.
“What we’ve seen and heard from our customer base is that nearly half of homebuyers experience an unexpected repair during the first year of homeownership,” says Daniel Blanaru, chief growth officer at Hippo.
That’s just what the protection covers — repairs within the first year of closing. But be warned: The protection doesn’t cover everything — nor will it offset the risk of waiving your inspection entirely. Buyers considering an inspection waiver could still be responsible for many repairs and expenses, so it’s important to have the full picture before making such a move.
Why are homebuyers waiving inspection contingencies?
This year has been tough for homebuyers. For-sale housing has hovered near record lows, above-asking offers have been the norm, and nearly two-thirds of buyers faced a bidding war in June alone.
In this competitive atmosphere, many are waiving contingencies — particularly the inspection contingency — to stand out from the pack. Removing contingencies reduces the risk that a buyer will back out, making the offer more attractive to sellers. All in all, 25% of buyers waived their inspection contingency in May, according to the National Association of Realtors.
Still, even with a waiver, most sellers are willing to let buyers arrange a home inspection for informational purposes. They just don’t want the sale hanging in the balance if the inspector finds an issue.
“Most sellers will agree to have home inspections done despite a buyer waiving the inspection contingency, as long as the buyers don’t have a backdoor to get out of the contract,” says Vickey Barron, a real estate broker with Compass in New York. “It would be a big red flag if a seller didn’t agree to a home inspection because it indicates there could be something to hide.”
This is important, because buyers will still need an inspection — and one through a Hippo-approved provider — to purchase Inspection Protection coverage.
How Inspection Protection works
Hippo’s Inspection Protection covers up to $100,000 in major structural repairs — including those on the foundation, roof, walls, ceilings, floors, doors and chimney — within the first 12 months after closing. The catch? They must be issues missed by the inspector.
To be eligible for the coverage, you’ll need to first get a home inspection from one of Hippo’s inspection providers. If you’re waiving your inspection contingency, you won’t be able to ask for repairs (or credits toward repairs) if the inspector finds a problem, but you will be eligible to purchase Hippo’s Inspection Protection coverage for any of the above repairs that are missed — at least during the first year.
Cost for the coverage averages around $350, but the exact fee depends on the home’s age and size.
The most important thing buyers need to know about this protection is that it will only cover issues not found by the inspector — and even then, only the big-ticket structural issues. Inspection Protection does not cover repairs actually noted in the inspection report. If you waive your inspection contingency and get a Hippo-approved inspection for informational purposes, any issues found will need to be repaired after closing — at your expense.
So, if you’re eyeing a fixer-upper or older home that may have lots of issues? Waiving your inspection — with this new protection or not — probably isn’t wise.
How likely is it that your inspector will miss something?
Without something like this protection in place, homebuyers would need to take legal action against their inspector or file a claim with the inspector’s liability insurance if a pre-existing issue were found later on. In both scenarios, though, there’s no guarantee the repair costs would be covered.
“The buyer’s damages can be very limited,” says Shaun Pappas, a real estate attorney and partner at Starr Associates. “The majority of inspection contracts provide that the inspection company’s liability is limited to the amount that the buyer paid for the inspection, which is generally not very much.” For reference, most inspections cost between $300 and $500.
Fortunately, agents say missed inspection items aren’t common — especially major ones within the first year.
“I don’t see this happening often,” says William Matthews, a longtime real estate agent from Houston. Matthews once had a buyer find issues with a hot water heater and dishwasher a few months after closing, but those aren’t items that’d be covered by the Inspection Protection guarantee.
For this reason, the benefits of Inspection Protection (and other future products like it) may be a bit limited. Still, it does offer coverage you can’t get elsewhere. Home insurance only covers sudden and accidental loss, like damages suffered in a fire, while home warranties are for lower-cost repairs.
According to Blanaru, Inspection Protection is designed more with big-ticket and pre-existing issues in mind. “It really aims to address a coverage gap,” he says.
For $350, that gap coverage — and the peace of mind it comes with — may be worth it for some buyers, especially those taking other risks, like waiving contingencies or offering way more than asking price. Is it a slam-dunk for every house hunter, though? Probably not.
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