How to Buy a House - Part 6 - Negotiating Repairs
Post-Inspection Navigation
The inspector is all done and has returned to you a report that is 28-60 pages long and only moderately overwhelming. You now have your inspection results, what do you do with this new information? Welcome to part 6 in the process for buying your house in Texas!
When you’re reading your home inspection, if you didn’t get the opportunity to attend the inspection walkthrough highlighted in part 5 of our series, you may find yourself a little confused and a bit overwhelmed. Not to worry, that’s completely understandable, there’s a lot of information in those pages and is often laid out in a way you’ve not seen before. Let’s take a quick walk through of what to expect with the inspection report as a document.
Below is a sample page from a real home inspection, you’ll notice to the left that there are little check marks inside various boxes. As indicated, each box has a corresponding meaning indicating if the item in question is present, inspected, and/or deficient in some way. In the example below, the inspection was performed on a single-story home so you can see that the section titled “Stairways” is checked as “NI=Not Inspected” as well as “NP=Not Present.” The property does have a fireplace so the “Fireplaces and Chimneys” section is checked “I=Inspected,” and because there’s a crack in the firebox, it’s also checked “D=Deficient,” to notate that there’s something that came up with the item that is incorrect, damaged, or no longer in code.
(If you're lost, you can go back and read the other sections, in the links provided below:)
A Note on The “D”
When an inspector marks something as “Deficient” it doesn’t always mean there’s something wrong with the area or thing, it can sometimes mean that the item in question is no longer up to today’s current code. Building codes change every two to four years on average as people find new and better ways to create safety around the environment in which we all live, so these building code updates inform new construction and renovation practices going forward. Being “up to code” is only required of new construction in most areas so just because something is flagged as being out of current code doesn’t mean it’s inoperable. The most common example of “out of code” I see on inspection reports around here deals with tank water heater installations. Current code requires that tank-style water heaters be elevated off the ground a minimum of 18 inches with a drip pan underneath them. Back in say the 1970s and 1980s when a lot of homes were being built in the DFW area, that was not a requirement so it’s not uncommon for tank-style water heaters to be located on the ground in a closet inside the home. The water heaters are often newer than 1970s or 80s as the average lifespan of a water heater is about 7 or 8 years, but while the tank is newer, the placement is still on the ground so the inspector has to flag a sometimes brand new water heater as “Deficient” because it’s not compliant with today’s current code. This example is also not usually something buyers request to be repaired if the water heater itself is properly functioning so it’s rare to have this come up in a repair request to the seller, however, it’s still marked as “Deficient” on the inspection report. I bring this up to point out that the phrase “Passed the Inspection” does not really apply in the literal sense when it comes to home inspections.
So, What Do I Need to Worry About?
Well, it depends. The inspection report can highlight some potential pitfalls of ownership while you own the home, or it can throw open the curtains on a big pile of reasons you should run screaming away from your beloved money pit. Your "pain tolerance" or, in other words, your willingness and ability to take on problems will dictate how much of the report make you want to run. If you are a handy sort, or have the means to fix the issues that have arisen, you may not be scared off by the gaping holes in the plumbing or sparking electrical, but keep in mind, if you have a loan you aren't the only one concerned with the property condition, the lender is too. Your real estate agent should be experienced enough to know what items will cause a red flag on the appraisal (therefore, with the lender), and be able to advise you accordingly. Every loan is different and knowing the details regarding your financing is key. For example, if you have an FHA or VA loan and there’s a hole in the sheetrock (maybe from a doorknob) then you will likely want to ask that it be fixed before the appraisal so that it doesn’t become a hang up in the loan process. While having a conventional loan, you likely aren’t as worried about a small sheetrock hole.
Alright, I’ve Identified the Required Repairs, Now What?
There are several ways to negotiate repairs, but there are three main avenues for getting your needs met. You can request the seller fix the items, reduce the sales price to an agreed upon number, or potentially have the seller contribute some money toward closing costs. There may be more creative options, but those are the most common 3 around these parts.
The first option of requesting the seller fix specific items, is the most direct way of getting what you want done. Like the example of the sheetrock hole above, you and your agent craft a specifically worded amendment that outlines to the most minor detail exactly what you want done. This is a double-edged sword in that if you get too detailed, i.e.: “Seller must use ABC Contracting to repair the 4.25 inch hole in the western most quadrant of the primary suite behind the main entrance door using XYZ Brand sheetrock, 123 Brand Joint Compound and Putty, and wait 3 days for drying before painting with the matching shade of 2HT745 Eggshell paint from Behr paints” You run the risk of scaring off the seller from any repairs. Or conversely, if you’re not detailed enough, i.e.: “Seller to fix the wall,” you may not get what you truly want because, what wall, where, and with what? So, how you craft your amendment depends on your goals in negotiation. I find that solidly specific wording regarding your objectives, coupled with a reasonable amount of good faith in people’s ability to do the right thing, followed up with a final walk through a few days prior to close usually yields good outcomes for all parties involved. There’s nuance with that of course, I base my amendments around my previous interactions with the listing agent and try to make them as foolproof as possible, but not so much as to insult an intelligent person. It’s a dance, but done the right way, it turns out beautifully.
The second option of asking for a price reduction is useful if you are a more experienced or handy buyer with plenty of funds in reserve to fix the problems yourself. A savvy agent may use some of the tactics in option 1 to facilitate/justify the price reduction request. Pointing out the damaged sheetrock, cracked fireplace, inoperable water heater, and other maladies uncovered by the inspection or other repair specialists can help the seller see that the easiest fix for them would be to forfeit some of their profits now to hold the deal together. For example, you’re under contract with the sales price of $450,000, and you’ve worked in construction your whole life and know that the list of repairs needed to the home will cost you $10,000 to do. Based on the fact that you’re particular about the work to be done and you want to oversee it yourself, you have your agent craft an amendment to have the seller to reduce the sales price to $440,000 so you can do the work yourself without paying more for it. If the seller agrees, you’re good to go to the next step and you get to keep a little more in your pocket. Here’s how it would impact your monthly payment:
Your original sales price: $450,000
Your original estimated mortgage payment: $3,393 per month
New sales price: $440,000
New estimated mortgage payment: $3,317 per month
The real gains are realized over the life of the loan as less interest is paid due to a reduced sales price. Unless you are paying cash then the gains are immediate.
The third option of asking for seller concessions to closing costs is similar to the second option in that you’re not asking the seller to take on repairing property but you are asking for money for the repairs. This method would be best used if you are trying to either A) have money on hand for the repairs immediately after closing, or B) have money contributed to either your closing costs or interest rate buy downs so that you have more money over time. I’ll elaborate:
Seller Concessions to closing costs is money taken from the seller’s net proceeds (the money they make from the sale of the house) and that money is then applied to your loan expenses either in the form of a credit to your closing costings, or in the form of buying down your interest rate.
If you use the concessions toward your closing costings, that leaves you with more money in your pocket at closing. For example, let’s suppose the following:
Your sales price is $450,000
Your required cash to close (minus your down payment) is $12,437
Seller Concessions are $10,000
Your new required cash to close (minus down payment) is $2,437
You get to keep $10,000 in your pocket and you can use it any way you see fit! It’s a great way to get the house you want and keep some cash in your pocket.
If you use the concessions to buy down your interest rate it would look something like this:
Sales Price: $450,000
Closing costs (minus down payment): $12,437
Current Interest Rate: 6.625%
Current Estimated Mortgage Payment: $3,393 per month
Seller Concessions used to buy down interest rate: $10,000
New Interest Rate: 5.25%
New Estimated Mortgage Payment: $3,075
Using seller concessions to buy down interest rates can make a big impact on your day to day expenses over all and this is not an uncommon concession these days.
Whatever way you work out your negotiating, keeping your primary goals in mind is the best way to navigate the process as a whole. Asking yourself these questions in the beginning and keeping them close as you negotiate will keep you and your deal on track:
Do these repairs have to be done in order to live in the property safely?
Do these repairs have to be done in order to have the loan go through?
Do these repairs require my supervision for me to be satisfied with their completion?
Am I skilled enough or know the right people to take on the completion of these repairs on my own?
Do I have the funds to complete these repairs on my own?
If these repairs are not, or cannot be made by the seller, do I still want this property?
Knowing the answers to these questions before you begin the repair amendment process will help you and your agent decide which of the 3 main negotiation options are the right path for you and/or perhaps you employ some combination of the 3 to reach the desired outcome. Either way, having the answer to these questions will make the process much easier for you.
The Takeaway:
Knowing as much as you can before you commit to the purchase is absolutely the best thing you can do. If there are things in the inspection report that need to be fixed, the option period is the time to negotiate them, and how you negotiate them is informed by your answers to some very simple but important questions. And, as always, a reminder that I LOVE what I do and I LOVE talking about real estate, so if you have questions, please ask. Questions give me purpose, and they give me more blog topics too!
Happy Hunting!
Emerald Scott-Farmer, Agent/Owner of
The EMERA Group of Keller Williams
Emerald@emeraldsellshomes.com
** I am not an attorney and cannot give legal advice. **
(But I know some good ones if you want recommendations)