Inspection Negotiation: Should you ask for repairs, credits, or a price reduction?
I tried to find an arm wrestling pic with someone who looked like me, but I guess for some reason stock photos don’t think women arm wrestle.
There are often 2-3 main points of negotiation during the home purchase process (with loads of potential minor negotiation points in between).
The first is when a buyer and their Realtor put together an offer on a home, which basically opens up negotiations. The second is during the home inspection period. The third can sometimes occur after appraisal.
This blog will focus on inspection negotiations and different routes a buyer can take to get a good deal that works for them.
Check out my blog “Real Estate Negotiation is a Lot Like Poker” for a fun take on negotiations in real estate.
Quick note: Wow, after I was about halfway through writing this blog I realized I could write for days and never run out of material on this subject! Negotiations during the inspection period can be very complicated, and in order to maximize the results for my buyers, it takes a lot of research, thought, and leg work because every single transaction is different. While I go into some specifics here, it still only scratches the surface.
I hope this article is beneficial, but please reach out if you have any questions about any of the information below!
As always, this blog is written with real estate in the state of Oregon, particularly the Portland metro area, in mind. Processes, terminology, paperwork, common practice, can all vary between markets.
Inspection Period
Once everyone is in agreement and all the paperwork is signed, the vast majority of real estate transactions immediately move into the home inspection period. This is frequently, though not always, a 10 business day period (at least here in Oregon). Day 1 is the first business day after all parties (or their agents) receive the fully signed and accepted sale agreement.
Real estate sales are most often terminated during the inspection period. It’s a critical time and that 10 business days flies by!!! The vast majority of the time, the inspection period is a contingency, and, basically, an unconditional one.
Earnest money: A deposit made, usually into an escrow account, by the buyer. The purpose is to show the seller that the buyer is serious about the offer and is a show of good faith. This money often goes toward buyer closing costs/down payment at closing. However, it may be forfeited to the seller if the buyer terminates the transaction for a reason not covered by a contingency.
Unconditional contingency means that the buyer(s) can terminate the transaction, largely without risk to their earnest money, for basically any reason at all. There are usually only a couple of these opportunities for a buyer to (somewhat) easily walk-away, and the inspection period is generally the most important. This is when buyers can perform all of their due diligence.
Bonus tip: Not every real estate transaction contains an inspection contingency. For example, many new home builders include the right to a home inspection in their builder contract, but it is NOT a contingency. Meaning: the buyers can have their own home inspections performed, but don’t have the right to terminate the transaction based on inspection findings without high risk of losing their earnest money. All of the larger builders and some of the smaller ones use their own version of the sale agreement, and buyers should enter into these contracts with utmost caution.
For more information about contingencies, check out my blog “5 Real Estate Contingencies You Absolutely Should Know About”.
Most residential real estate transactions (not including new construction) undergo a 2nd round of negotiations for repairs/credits/price reduction at some point during the inspection period. If an agreement cannot be reached with the seller during this time, then the buyer can terminate before the end of the inspection period with little risk to their earnest money.
It should be noted, and this is something even a lot of real estate agents forget or don’t know: the standard sale agreement paperwork includes a section that specifically states that the sale of the property is “as-is”. But, in practice, issues with the home will be uncovered during the various inspections that could be material to the sale, from the buyer’s perspective, and sellers are generally well aware that repair/credit negotiations are expected.
Ask your Realtor lots of questions during this process. Never be afraid to speak your mind!
Using the inspections as a jumping off point, the buyers may or may not procure expert opinions and repair bids from different contractors. When I represent the buyers, I prefer to gather as much data as I can, so that my buyers have as full of an understanding regarding the issues with the home and costs as is reasonably possible. Especially for larger dollar repairs, bids can be critical when negotiating with sellers.
But, some buyers and their agent just use the inspection report as a template for writing up a repair addendum and then leave it to the sellers to determine what the cost of those repairs would be.
Asking for RepairS
If, after the inspections, the buyer is still interested in moving forward with the sale, negotiations at this point can come in the form of repairs, seller-paid closing cost credits, and/or a price reduction. Sometimes a home warranty can be a part of negotiations, too. (More about that further below.)
These can also be referred to as seller concessions.
Not all contractors are equal.
It can be difficult for buyers to decide what they want to ask for. This is one of many crucial points of the transaction where your Realtor should offer expert guidance. This is also why I like to collect my own repair estimates. With larger, more costly repairs, I may try to get 2-3 bids, as various contractors certainly have differing opinions and prices.
If the buyer prefers to ask the seller for repairs, then the buyer’s agent writes up a repair addendum. This needs to be done carefully, since the wording used determines exactly what the seller will be required to do.
Most buyers at first assume that getting the seller to pay for and complete the repairs prior to closing is the best option. Why deal with doing the work themselves when they can have it done before they even own the home?
Particularly when it comes to homes sold by builders and flippers, asking for repairs is usually the best route. They have access to resources and sometimes are their own contractor, so repairs are relatively easy for them to manage.
For more standard owner-occupied homes, asking for repairs can be a good starting off point for negotiations, and then it can be determined what the owner is willing to do or is capable of doing, and what might best be done by the buyer after the sale is complete, through the use of credits or a price reduction.
However, there are a few things to consider before choosing to ask for repairs:
Sellers will want to use the cheapest contractor they can find, regardless of quality, and time limitations will make it difficult to perform the due diligence necessary to find the best contractor at the most affordable price. I sometimes negotiate for specific contractors to perform the work, but many sellers refuse and time constraints make it difficult to book the best contractors.
It’s still the seller’s house, and they supervise the work. The seller simply does not have as much “skin in the game” as the buyer when it comes to making sure repairs are completed adequately. (Buyers can, and often should, have a re-inspection done after repairs are complete, but once repairs are finished, it can be difficult to see if the work was done properly.) I can also tell you from frequent experience that waiting for sellers to complete repairs and hoping that they are done properly is nerve-wracking for buyers (and their agent). Closing delays often happen when sellers fail to complete agreed-upon repairs adequately. Disagreements about repairs can cause a transaction to break down and even lead to arbitration.
The sellers may no longer live anywhere near the home, making it very difficult for them to order and supervise repairs.
The sellers may be completely unwilling, or even unable, to pay for repairs out of pocket prior to closing. Some types of contractors allow the sellers to pay them after closing from the proceeds of sale, but this is risky for both the contractor and the seller and is generally a last resort.
The repairs may take longer to complete than is possible to meet the current closing date, which could take the buyers past their rate-lock, impact other closing dates (if other real estate sales are contingent upon it), or push the buyers into paying for an extra month of rent.
Most residential real estate transactions happen in 30-45 days. It behooves the buyer to take their time gathering bids, and after they own the home, they will have the time to find contractors that may not have been available within 2-3 days during the inspection period, potentially allowing them to find better, less costly contractors.
Some buyers prefer to utilize contractor bids to maximize credits/price reductions, but then take on some or all repairs themselves to save money.
So, in the interest of all the above reasons and more, buyers and sellers often negotiate for closing cost credits and/or a price reduction in lieu of repairs.
Asking for Credits in Lieu of Repairs
What does a credit in lieu of repairs mean?
When you purchase a home, there will be a certain amount of closing costs and prepaids.
Prepaids include taxes and insurance, which need to be paid forward if the buyer chooses to escrow their taxes and insurance (I could go into a lot more detail explaining this, but I don’t want to bog this blog down any further!)
Closing costs include title fees, title insurance, lender fees, points, recording fees, etc.
Buyers often, but not always, prefer cash in hand (credits) vs cash spread out over the life of the loan (price reduction)
Lenders allow sellers to contribute to many of these closing costs and prepaids. The loan program will have limits to how much the seller can credit to the buyers, so communication between the Realtor and the lender is crucial when negotiating.
Here’s an example:
Say there are about $12,000 in estimated closing costs on a home being purchased for $450,000.
Repair estimates come up to about $10,000.
The lender lets you know that the seller can contribute up to 3% of the sale price in closing costs (which would be a max of $13,500).
Since the closing costs are less than $13,500 AND the repair estimates are only $10,000, the buyer could ask the seller for the $10,000 in closing cost credits, in lieu of repairs. If the seller agrees, the buyer would only need to bring $2000 to closing instead of $12,000. That’s a big chunk of change that stays in the buyer’s pocket that they can use as they wish once they own the home.
(FYI, down payment is separate from closing costs, so that wouldn’t change.)
So, when negotiating for repairs, if the total repair estimates fall at or below the total closing costs AND at or below the lender-allowed seller contributions to closing costs, then the buyers could ask for a credit in lieu of all the repairs.
What if repairs are MORE THAN the closing costs or more than the lender allows?
In that case, buyers can negotiate for a mixture of closing costs, price reduction, and repairs. This has certainly become increasingly common. I’ve had several transactions this year alone where I negotiated for more than 20K of concessions, in a mixture of repairs, closing cost credits, and price reductions.
How often do buyers choose to ask or accept credits in lieu of repairs?
Negotiation is about getting what YOU want. There’s no wrong option!
I’d have to say it’s definitely somewhere north of 50% of the time.
The Portland market is hot and competitive so closings tend to be pretty short, closer to 30 days than 45+. This doesn’t give much time to go through inspections, negotiations, and repairs before closing.
This is something I discuss in detail with my buyers, and everyone has their own comfort level when it comes to taking on repairs. No existing home will be perfect and buyers do have to accept that there will be maintenance items and at least other minor repairs that they will take on when they purchase a house.
But, a home that needs a new roof, sewer repairs, and has a furnace on it’s last legs is a lot different than one with a little beat up trim and a cabinet door off-kilter.
It comes down to more than just condition vs price because we’re not even talking about “fixers”. A home could look fantastic on the surface, but the home inspection can easily reveal 15K+ in repairs/maintenance that need to be tackled within a year or two. This is more than just common, it’s frankly pretty much expected.
I also personally like asking for credits in lieu of repairs, because often I can negotiate for more in credits than the repairs themselves would actually cost once buyers have time to research contractors. Or, the repairs are something that might not be immediately necessary, so the buyers can choose to use those funds for whatever they want, whenever they want.
Asking for a Price Reduction in Lieu of Repairs
In some cases, buyers prefer a price reduction instead of a credit to closing costs/repairs. Or, the total concessions equal more than what the lender allows as a seller contribution to closing costs.
Unless the buyer is purchasing the home with cash, or intends to pay off the loan VERY quickly, reducing the sale price doesn’t often serve as great of a benefit as a closing cost credit.
Why do I say that?
$10,000 at 3.5% in a loan paid back over a 30 year period equals $45/month. Sure, that means a ton over time, but doesn’t help a buyer much that needs to get 10K in repairs completed immediately.
For this reason, buyers often prefer a closing cost credit.
But, if a buyer does prefer to ask for a price reduction, there’s nothing wrong with that. Sellers generally don’t care because the net proceeds of sale is close to the same whether it’s a closing cost credit or price reduction.
For buyers with plenty of liquid funds, reducing the sale price can definitely be the best option. And, in the case that the buyers want to ask for more than the lender allows in credits to closing costs, asking for a mix of closing cost credits and price reduction works very well.
Home Warranties
Sellers often like to offer a home warranty, especially when there are high dollar components nearing or at end of life.
Warranties might protect from a little rain, but not much use during a tornado. Still good to have during a storm, though!
For instance, if the home inspector calls out a 30 year old furnace and lets the buyer know that it still works but is past life expectancy, the buyer may want to ask the seller to replace it or provide a closing cost credit.
The seller may feel that’s unnecessary, because it still works, right? So, they’ll try to offer a home warranty, hoping that will make the buyer feel better.
I could probably write a whole other blog about home warranties, but here’s my relatively short take on them:
A roughly $500 item (a one-year home warranty can be more or less than that, depending on several factors) simply doesn’t make up for a component that will easily cost $5000+ to replace.
Yes, technically, a home warranty means that replacement is covered if the component completely fails… but, like any warranty, there are a lot of catches.
First, the warranty company will start with replacing any defective part they can find up to and beyond reason. They’ll try to keep that component clunking along because they know it’s highly unlikely you’ll renew the warranty after the first year (and even if you do, it reduces their loss).
Warranty companies are pretty notorious for taking a long time to get someone out to the house, too.
Warranty companies usually require you to use their contractors, and, if in the rare occurrence they determine replacement is necessary, there is usually a deductible and they require you to accept whatever replacement they deem adequate (even if it’s not).
Yes, there are some horror stories out there of home owners saving tens of thousands of dollars because of their home warranty, but those are the extreme rarity. More frequently you’ll find stories of frustration and failure.
Regardless of all of the above, it’s always better to have a home warranty than not to have one, it just doesn’t hold all that much weight in negotiations.
So, a home warranty can be a nice added “peace of mind” benefit if the seller is offering one, but I would never recommend accepting one instead of negotiating for a larger credit for a defective or well past end-of-life component.
But, what if the components aren’t quite end-of-life, but have been inadequately maintained, and there are concerns about longevity?
In cases like this, a mixture of a home warranty and a partial credit could be a good compromise.
Conclusion
I like to refer to the inspection period as data gathering. We’re doing our due diligence: performing inspections, getting specialized contractor opinions/bids, researching the history of the home, looking up permits, asking the seller questions, and verifying any other information that could be material to the sale.
This is a time where falling in love with the home and getting an offer accepted crashes into the reality of plunking down a ton of money for it. Take a deep breath, ask questions, look at all the data, and determine what you need to ask for from the seller to make it a good deal for you. Listen to your Realtor’s advice, but also evaluate what makes the most sense for you!
