The inspection came back bad. Now what?

You’re under contract on a home. The general inspection (or the sewer scope, or the foundation check, or the pest report) came back with something serious. You don’t want to buy the house anymore.

If you’re still inside your investigation contingency window, this is a clean, normal situation. The contingency exists for exactly this reason. Here’s the process.

You haven’t done anything wrong

Backing out during the inspection contingency isn’t a moral failure or a breach of trust. It is the protection you negotiated. Sellers know the contingency window exists. Listing agents know it exists. Other buyers in the deal pool know it exists. Using it the way it’s meant to be used is normal.

The investigation contingency in California gives you a default seventeen-day window to inspect the property, review the disclosures, and decide whether the condition is acceptable. If it isn’t, you have a clean exit.

What actually happens

Three things have to happen, in this order:

1. You tell me right away. As soon as the inspector hands you the report and you’ve decided this isn’t your home, call. We don’t wait. We don’t let the contingency deadline run out by accident.
2. We make the decision: cancel, or try to negotiate first. Sometimes a bad inspection is a price negotiation, not a deal killer. If you might still want the home at a lower price or with seller-paid repairs, we’d typically start with a Request for Repair (the C.A.R. RR form) and see how the seller responds. If you’ve decided the home is wrong regardless of what the seller offers, we skip that and cancel.
3. We file the cancellation before the deadline. I’ll prepare the Cancellation of Contract (C.A.R. CC form) and we’ll get it signed and delivered to the listing agent. The cancellation has to be in writing and delivered within the contingency window.

What happens to your earnest money

When you cancel inside the contingency window for a covered reason, you get your earnest money back. The release of those funds isn’t automatic — escrow needs signed authorization from both you and the seller. I’ll prepare a Mutual Release of Funds in Escrow at the same time we file the cancellation. The seller signs, escrow refunds your deposit, and the transaction is closed.

In most cases, this happens within a week. Occasionally a seller will drag their feet, and we have other tools for that. Your deposit is safe; the question is just how quickly it returns.

What about the money you’ve already spent?

Inspection fees are not refundable. If you paid for a general inspection ($500-$900), a sewer scope ($300-$500), or a pest inspection ($150-$300), that money is gone. Think of it as the cost of finding out the house was wrong before you bought it. Compared to the alternative — closing on a home with a $40,000 foundation issue — it’s the cheapest insurance you’ll ever buy.

Why we don’t agonize over this

I’ve watched first-time buyers try to talk themselves into a home that the inspection clearly said no to, because they were embarrassed to cancel or worried about how the listing agent would react. Don’t do this. The seller and listing agent will be fine. There are other buyers. The home will resell. The system absorbs cancellations easily — it’s designed to.

The thing you cannot easily undo is closing on the wrong home.

A note from me. If a Bay Area buyer never cancels a single deal during their contingency window, they’re probably either very lucky or being too easy on themselves. Cancellations during inspection are part of how a careful search works. The home you eventually buy is the home that survived your inspection — not the first one you happened to be under contract on.

The bottom line

Inspection came back bad. You’re inside the contingency window. The path is:

• Tell me immediately
• Decide whether to negotiate or cancel
• File the cancellation in writing before the deadline
• Get your earnest money back
• Move on to the next home

You used the system the way it’s built to be used. That’s a good day’s work.