The upside is that if the defects that are found in the inspection are not repaired, there is a good chance that nobody else will want the home either and once the seller is made aware, they are required to disclose to any future buyers.
I've been on the purchasing end of roughly a dozen homes. They all follow a similar process.
1) Look for a home till you find one that you would like to buy
2) Place offer on home with a few contingencies (Home Inspection is definitely 1 of them)
3)Seller accepts, counters, or rejects your offer
NOTE: Once seller accepts your offer (or you accept their counter), all other offers are typically rejected. It's important to also note that you are now starting 1-on-1 negotiations with the seller, not ending them.
4) Pay for a Home Inspection. It's money much better spent than having a handyman or renovation expert, whom will absolutely claim no liability if their opinion is "FAIL". A home inspection comes with an inspector (whom can be held liable) should a major defect (or a few minor ones) in the home goes undetected.
5) If the home inspector finds flaws that weren't disclosed by the seller (or more accurately "when the home inspector...") You are able to ADJUST your offer or outright rescind it.
NOTE: Since you are in 1-on-1 talks with the seller. It's not very likely that the seller will reject your ADJUSTED OFFER unless it's an unreasonable one. The seller typically wants to sell their house and very likely isn't in the mood to re-list their property again.
Although bluewickedburner's answer suggests that the seller has the upper-hand at this stage. He's not spot-on, he's spot-wrong! Yes, buyers have emotions; but it's more important to note that the seller has emotions too!
If a seller is selling a home, they are moving into another home, selling a relative's home, or selling an investment property. Their motivations for selling are likely stronger than your buying motivation. In fact, if the seller is buying another home (their motivation is to avoid 2 mortgages); if the seller is selling a relative's home (their motivation might be inheritance distribution); if the seller is selling an income property, well - this might be were the seller has the upper-hand motivation-wise.
When you honestly think of it, the seller's wants to sell their home and they're competing with all the other homes that are out on the market. Since the seller is selling their home, they likely haven't seen their competition, they've only been informed by their realtor; meaning they are not likely to know exactly how well their home stands out from the others.
As the buyer, you've definitely seen the competition and honestly the buyer likely has a "plan B" all lined up already should things fail with "plan A".
P.S. It's nowhere close to being true that if you have an inspection done on a home that you're giving the seller a FREE HOME INSPECTION. For one, the seller will not receive a copy of the home inspection you had performed unless you hand it over to the seller yourself! However, it will be helpful in your serious negotiations with the seller to provide him a glimpse of it while noting the flaws that you are basing your ADJUSTED OFFER on.
Getting back to the process now
1) Find a house
2) Make an offer
3) Seller accepts offer
4) Spend $400 and perform inspection
5) Make adjusted offer and save thousands more that your 1st offer!!
6) Seller accepts adjusted offer!
7) WIN-WIN for everyone!!
8) In the end, you also have piece-of-mind knowing that you're likely moving into a home without major defects. You also have recourse and can also sue the home inspector and/or seller if you find any severe flaws and should have been disclosed by the seller or missed by the inspector.
Think about this carefully. Some say there is no benefit to spending money on the inspection since the offer might not be accepted. Fine if you have to pay for it but in most cases you can get this for no cost to you. Furthermore, the seller really can't refuse since all you are doing is looking around, as any prudent buyer should do before making an offer.
Next, why go through all the effort of making an offer on a house that someone knowledgeable can tell you isn't worth any amount you can offer? Are you in such a hurry to throw away money?
For any other large purchase, don't you find out everything BEFORE offering to buy? Sure you do but somehow, for a house, everyone wants to part you from money first.
Buyers are being relegated to a revenue source with virtually no control over the home buying process and that needs to change. Why are things like this? Inflated ideas of where the money comes from. It comes from the buyer and goes to other people so take charge of how that happens.
Why would you want to spend hundreds of dollars on a home inspection when someone knowledgeable can tell you that there are serious problems before you spend a single penny? Why is there such an urgency to part you and your money?
Read the reasons listed in the answers. Where is your benefit in not having it inspected before an offer? Oh, you might lower you offer and not get the house? It is better that you pay more through ignorance and get the house?
It is past time that buyers get ahead of the curve on the purchase process. Go ahead and talk to some home repair/rennovation/remodeling specialists and tell them what you want to do. You'll find that in almost all cases one of them will gladly accompany you on a walk-through inspection, getting down to knee and floor level to check things. They will know the difference between a small leak under a kitchen sink and one where it is probable that you have underlayment or subfloor problems.
In the hands of a professional, a flashlight and good eyes can help you make the decision on offering at all. To make an offer, in lots of cases you're going to present pre-approval letter, proof of downpayment, lots of other information and how much you want to pay. Yes, you can inspect AFTERWARD but in what transaction on earth do we do this except when buying a home? No one in their right mind offers to spend hundreds of thousands of dollars without knowing if the offer should even be made.
If nothing else, this next tidbit ought to give you pause. You offer on a house. Then after acceptance you start having the inspections. Now after the offer is accepted, you get happy. Why? Human nature. You get happy, your wife starts planning where things go and how to make a home. You start to become emotionally invested, it happens. Guess what? Everyone else, the seller, the seller agent, and YOUR buyer agent know this too. The deeper you get into the deal the more difficult it is to disengage emotionally and the more likely you are to accept things as is. So you spend hundreds and even more than a thousand or two, depending on the inspections needed. Then you find out bad news and the seller won't budge. You back out. Yes, you can always try to negotiate the price down, even for "as-is" sales but why even go there for obvious major issues that would stop you from buying no matter what?
Are you going to get that money back you paid for inspections? Heck no! You just gave the seller all those inspections for nothing and everyone put some money into their pockets except you.
Again, a walk-though type inspection isn't the end-all nor completely definitive but it can sure help you from making a big and costly mistake. Funny how everyone want to separate you from your money so quickly isn't it?
Run away from people who seem to be in a hurry to get you to offer first and find out later. Later always means YOU spending money. Always.
Why pay $400-$500 (larger properties can run more) before you even know if the seller will accept your offer? What if you have the inspection and they reject your offer outright? Huge waste of money.
Just write an offer contingent upon a satisfactory home inspection. If significant defects are found, you will have the option to walk away or request a reduction in price from the seller/bank.