5 Strategies (and mistakes) Agents Use Negotiating Home Inspections

Real estate agents have not had to deal with negotiating home inspection issues for a years because the market was so hot that buyers were purchasing properties without a home inspection.

In this column, I'll address:

Correctly negotiating a home inspection response so the buyer and seller actually get what they want and avoid needless last-minute surprises which can cost money and possible legal action.
Options when the seller does not complete (or complete correctly) the requested repairs.
Too much money - when the buyer wants more than the loan program will allow for home inspections.

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The Right Response

Every home inspection uncovers defects. It's nothing for the seller to defend and for buyers to freak out about. Every home is slowly falling apart - even if it's a new build.

I'm assuming most reading this article understand the basics of the home inspection (find defects, provide opportunity to negotiate fixes and replacements, or cancel the contract and earnest money deposit is refunded).

Here are the mistakes I witness in this process - it's enough to drive a broker to drink (heavily!)

#1 - UNCLEAR ABOUT WHAT YOU WANT, when you want it, and what happens (the consequences) for missing the deadline

What Do You Want?

Say it - don't hint around, and don't cut and paste the inspectors findings in the HICRA - "The HVAC is not operating optimally" is a passive way of saying "Seller to have HVAC system inspected, serviced and repaired or replaced by a licensed HVAC company."

If the buyer actually wants a new HVAC system because it's at the end of life - then say it: " Seller to replace HVAC system."

And that enters us into another issue

#2 - ASKING FOR TOO MUCH SELLER CONCESSION

When the buyer has negotiated closing costs concession, adding on home inspection credits could catapult the concession beyond what the lender will allow. And the level of credit depends on the down payment the buyer is making.

RealEstateSwitch.com reports Fannie Mae and Freddie Mac's limits for conventional financing are:

3% in seller credit with a down payment of less than 10%
6% in seller credit with a down payment of 10–24%
9% in seller credit with a down payment of 25% or more
2% in seller credit for investment properties, regardless of the down payment

As you can see - if you've received 3% concession in the contract, asking for another $5000 in lieu of home inspection repairs isn't going to work. Which brings you to...

#3 - Holding funds in Escrow by title company

A way around the "too much concessions" issue, is for the seller to pay for the repairs with funds from escrows. Thus, the seller is paying for the repairs, not helping the buyer with closing costs assistance.

Lenders will allow escrow funds to be held IF, the funds are NOT being held for mandatory fixes (what the lender already cited as needing repair to get the mortgage approved). But, with lender approval, money can be negotiated to be held in escrow -- again -- state what you want; when you want it and the consequences if the seller fails to perform.

The escrow agreement would stipulate

how much for the repairs (and don't be surprised if the lender wants 150% of the bid of repairs - just to ensure it's enough);
who is holding the funds;
how long they can be held; and
how they will be released.

#4 - SUBMIT INVOICE TO BE PAID AT CLOSING

This approach by passes the lender situation altogether. Let's say the seller didn't fix the front door and paint it like they agreed. An invoice from a repair company can be submitted at closing - and the seller's funds pay for the invoice at that time. Now the repairs can be completed in arears. In this case, I advise the buyer select a vendor of choice so there are no trust issues.

#5 - DELAY CLOSING UNTIL REPAIRS ARE COMPLETED

Again - what do you want, when (the delay) and what happens if the seller misses the deadline again?

I had a home inspection in my last transaction

I did not have a home inspection in my last transaction

My buyer accepted concessions instead of home inspection repairs.

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