Waiving the inspection contingency should be illegal

With the massive mismatch between supply and demand, many of the hottest real estate markets now are ones in which waiving all contingencies (inspection, appraisal gap, etc.) is “required” to win the contract. For established buyers, putting their EM at risk in a take-it-or-else situation is uncomfortable; for first time buyers, who in many cases have just scraped together enough for a down payment, the loss of EM can represent the loss of an ability to buy a house. All of these buyers are put in a terrible predicament — because at least one party in most deals is willing to be careless, now everybody else has to be careless to compete. While it’s likely going to be “ok” in many/most cases, there will be those where a major issue with a property becomes an unanticipated financial burden.

It should be illegal to waive the inspection contingency (and it should be required to get an inspection before buying a property). For most buyers, this is the largest financial decision they will make in their lives, and they are doing so with a major information asymmetry between them and the sellers. In no other area of finance would such a major commitment be undertaken without appropriate due diligence — the only reason it is here is that, with supply so limited, some buyers are willing to do careless things to stand out. We do many things to protect regular people from information asymmetry like this in other places: we don’t allow non-accredited investors to invest in non-listed companies, we require things like lead paint disclosures, we have standardized the real estate contract to include these contingencies. We recognize that it’s bad for society to allow people to put large amounts of their net worth at risk without adequate protections.

The analogy I would make is one of the big reasons why steroids aren’t allowed in sports: because it removes the choice to make a healthy decision from anyone who wants to win. If anyone uses steroids, everybody must if they want to win, which is bad for everyone — so we ban them. We should do the same with the inspection contingency waiver.