Buyers: Use the home inspection to negotiate your best deal
Beauty is in the eye of the beholder. This is true when it comes to property, too. Yet even a home that’s perfect from your perspective is bound to have some defects, both major and minor.
While this may surprise you, it’s actually not uncommon to find problems in newly-constructed properties as well as older homes. Some issues may not be terribly noticeable, while others could affect livability. A thorough home inspection will reveal all.
Once you discover the issues, what’s next? This is the tough part of a real estate transaction: negotiating with the seller. Post-inspection negotiations could become a rollercoaster ride if not handled with care. There’s much at stake, too. The prospect of closing a deal depends on finding a resolution.
How do you begin to approach this? We’re here to give you the lowdown on home inspections, including exploring your options afterwards and negotiating to successfully close the deal.
You’ve done the home inspection. Now what?
The inspection report has arrived. What should be your course of action? What truly needs your attention, and what can you overlook?
Time is limited, so you need to make a few key decisions quickly. A buyer typically has 10 days after receiving the report to send any requests for repairs to the seller.
Here’s what to address during this period:
- Read and discuss the report.
After objective observation, the home inspector provides an exhaustive list of current problems and potential issues in the inspection report. It’s important to read it thoroughly and act upon the repairs identified before buying the home.
Your real estate agent can help you determine your options post-inspection. Perhaps you could ask the seller to make all the repairs mentioned in the report. Would it be appropriate to share the complete report with the seller? What does your lender say about the repairs? Your agent is your best guide.
Depending on the current market conditions, and the cost and severity of the repairs, your agent will suggest a list of priority fixes. Not all issues require the seller’s attention, of course; you should focus only on the most critical ones. (You can ignore that worn-out carpet, funky 90s tile or overgrown shrub in the backyard.)
- Identify the issues to be fixed.
If you’re a first-time homebuyer, seeing a crack in the wall could easily frighten you. Don’t panic yet. It could be a superficial crack that needs little attention. Your home inspection report will determine the severity of issues like this. Instead of focusing on topical stuff, this is your chance to identify the problems that pose serious health or safety concerns.
Some issues that affect your livability in a home are:
- Mold damage: Any mold in the home indicates water damage caused by a leaky drain or poor air circulation. This poses a severe health risk to inhabitants.
- HVAC system: Improper maintenance of HVAC systems leads to suboptimal performance and diminished interior air quality. (You don’t want to swelter in the heat just after moving in, especially if you live in a warmer climate…and you definitely don’t want to shiver indoors during chillier winter months.)
- Electrical system: Outdated wiring or a missing GFCI outlet are potential fire hazards and would warrant immediate repair.
- The plumbing: Low water pressure or slow-moving drains indicate a blockage in the plumbing and need attention.
- The roof: If missing shingles, damaged flashing, and gutter problems are reported, the roof could leak. A solid roof is critical and because it’s a big expense, it’s worth a negotiation with the seller.
- Appliances: The seller should either repair or replace dysfunctional appliances. But, remember that not all appliances are included in the purchase contract and you should request repairs for only those included.
The bottom line? Be logical and reasonable when sharing your list of requested repairs for the seller. Once you have your list prepped, you can move on to the next step.
You’ve learned what repairs are needed. What are your options?
Provided the home inspection didn’t reveal any deal-breakers and you’ve decided to move forward with the purchase, you have three options:
Option 1: Ask the seller to make the repairs.
In this case, your agent must send a repair addendum listing all repairs you need. Keep in mind that the specific verbiage used in the addendum will determine the seller’s responsibility. For example, instead of writing “check the water pressure valve,” clearly mention “check the water pressure valve and replace it.”
If the seller is a builder or a flipper, you’re in luck. Since these folks have access to all kinds of home repair resources and skilled contractors, they’re usually equipped to make the repairs by closing time. With owner-occupied homes, however, it can be trickier.
Finding the best contractor within a short period can be time-consuming and exhausting for the seller, who may have full-time work and/or caregiving responsibilities on their plate. Further, it’s stressful for you as the buyer to hope that the seller supervises and completes the repairs properly. In extreme scenarios, unforeseen repair circumstances could delay the closing date.
For these reasons, some buyers and sellers negotiate for buyer credits or price reductions.
Option 2: Ask for buyer credits.
Think of these as an exchange from the seller. You won’t have to front as much cash for closing, depending on the amount. Asking for buyer credits could be a win-win situation for both you and the seller. How?
There are myriad closing costs in a real estate transaction. Costs can include—among others—title transfer fees, recording fees, prepaid expenses like taxes or insurance, and more.
When negotiating, you can ask the seller to pay for these in place of the repairs. The seller may give you the credits, considering the effort involved in making the repairs.
Note: Can you ask the seller to provide buyer credits for all closing costs and prepaids?
No, you can’t. The lender will tell you how much a seller may contribute based on your loan program.
Let’s say the repair estimate for a $350,000 home is $10,000 and closing costs come in at $12,000. The lender allows the seller to contribute up to 3% of the sale price: $10,500. If the seller agrees to provide buyer credits, then you only need to pay only $1,500 toward closing costs instead of the required $12,000.
Keep in mind that this buyer credit arrangement is possible only when repair costs are less than closing costs. If repair costs are higher, you can negotiate a mix of buyer credits, repairs, and price reductions.
Option 3: Ask for a price reduction.
Negotiating for a price reduction is the right approach when the seller can’t afford the repairs. Also, a seller may offer a discount—especially if they’re eager to close the sale.
Note: If you’re planning future renovations that’ll make the home’s current defects obsolete, then asking for a price reduction won’t be necessary.
You want to move forward. How do you negotiate?
These tips, along with advice from your realtor, can help:
- Prioritize what’s most important.
The first part of negotiating after the home inspection begins with your repair request list. Prioritize only the most significant items for repairs. If you still have doubts on which issues to include, refer to this American Society of Home Inspectors (ASHI) classification.
- Be reasonable with your requests.
The home inspection report shouldn’t be your leverage for vehemently demanding a price reduction. Instead, be reasonable with your repair requests. Provide proof to the seller why the requested repairs are essential. Make sure to send a copy of the inspection report to the seller.
Unreasonable requests could anger the seller, putting the deal in jeopardy. Remember that market conditions and human emotions will be at play during the negotiations. Being mindful of what you ask for is essential. A competent real estate agent will advise you on what is considered reasonable.
- Don’t reveal too much information.
While sitting with the seller’s agent, don’t reveal information. If you mention the costly renovations you’ve planned for the home, for example, it may result in the seller offering less for repairs. Also try not to fawn all over the property’s features that you absolutely love. Instead, wear more of a ‘poker face’ and let your realtor deal with the questions.
- Be ready to walk away.
Can’t reach an agreement with the seller? Be ready to walk away having forfeited your hand money. This might sting a little bit, but know this: short-term pain is better than long-term regret. Whatever you’re losing in terms of time and a smaller amount of cash may wind up saving you from major headaches down the line. And the right home that meets your standards could be just a search away.