As an investor, you're probably aware that the negotiations on a real estate transaction don't stop once your offer gets accepted. Rather, you still have to negotiate the results of your inspection contingency. With that in mind, below is a guide on how to counter offer a home inspection. Read it over so you can go into this process feeling confident about your ability to negotiate in your best interest and to make the best decision for you and your bottom line.
What is evaluated during a home inspection?
Before we can get into the specifics of how to handle your home inspection negotiations, it's important to make sure you understand exactly what's evaluated during a home inspection. To that end, we've listed out all the components that are included in the inspection for your review below. Read them over to get a better idea of what you can expect to find when you have your report in hand.
- Structure: First and foremost, your inspector will look for signs of damage to the home structure, including cracks in the walls or signs of injury to the foundation.
- Roof and attic: The inspector will also perform a visual inspection of the roof and go up into the attic to make sure everything appears structurally sound.
- Systems: The inspector will run the home's systems -- such as the HVAC system -- to ensure they're functional.
- Basement: If the property has a basement, the inspector will also look there for structural issues.
- Plumbing and Electrical: Part of the inspection also involves testing all of the home's plumbing and electrical components to ensure they function properly.
- Appliances: The inspector will likely test any major appliances to ensure they're in working order.
That said, what's not covered under the home inspection is just as important as what is covered. It's crucial to understand that a home inspection is primarily a visual inspection, which means the home inspector can't be held responsible for identifying any damage occurring behind the walls. In addition, structures that aren't part of the main property itself, like a pool or a shed in the backyard, don't typically fall under the scope of a home inspection.
Understanding the process: What are your negotiation options?
Now that you have a better understanding of what's involved in a home inspection, it's time to get into the specifics of the negotiations. In particular, as the buyer, you can generally take three paths during the negotiation process. We've laid them out for you below so you can decide which option might be the best fit.
Ask the seller to make repairs
The first option is to ask the seller to make any necessary repairs for you. However, generally, this option isn't often recommended. Usually, sellers find it to be an inconvenience because it adds more work to their to-do list at a time when they're already busy trying to make a move.
Granted, it's not an ideal option for buyers either. With this option, the buyer has very little control over how the repairs are completed. In short, there's no way of knowing if the repair will be done to your standards.
Ask the seller for a concession or credit towards the repairs
Instead, the better option is often to ask for a seller concession or credit towards the work. In this case, you and the seller would come together and agree on a price that will cover the cost of any necessary repairs. Once you've agreed on a set amount, the seller can agree to lower the home's purchase price by that amount or to pay an equivalent percentage of your closing costs.
Typically, both buyers and sellers prefer this method because it's easy. Here, no money actually has to change hands. In this scenario, the seller will just receive slightly fewer proceeds when it's time to close on the home. From your perspective as an investor, it can also be helpful because it means you'll have to pay less money for your investment up front.
Walk away from the deal
With that said, keep in mind there's a third option to consider. When you elect the inspection contingency, if you're unsatisfied with what you find in the inspection report, you have the option to walk away from buying the property. Notably, you're allowed to do so while keeping your earnest money deposit in hand.
While no investor ever wants to have to walk away from a deal, if you think the scope of the work required is going to be too much for you to handle or that buying this home will ultimately hurt your bottom line, it may be something to consider.
How to counter offer a home inspection: Negotiation tips
If you've received your home inspection report and you're ready to move forward with the deal, the next step is to successfully negotiate. While your real estate agent and the listing agent will handle the bulk of the negotiating for you and the home seller, you are the decision maker in this scenario. To that end, below are some tips to help you come out ahead.
Get estimates first
Since investing in real estate is all about looking at the deal from a financial perspective, it's important to make sure everything you ask for in the negotiations makes sense for your bottom line. To that end, you're going to want to get estimates for any repairs recommended by the home inspector. That way, you can rest assured you'll ask for enough money to cover the cost of the repairs, and on the seller's end, the estimate will provide proof that you're asking for a fair amount.
Additionally, if you're on the fence about whether or not to stay in the deal, gathering estimates can help make your decision process easier. If, after getting estimates together, you realize the amount of the work the property needs is more than you can handle, you can walk away knowing you've done your due diligence. However, if the estimates show the work is affordable, you can stay in the real estate transaction and feel confident that you won't be blindsided by unexpected costs.
Ask for the most important items
Next, many new investors often make the mistake of asking for a laundry list of repairs. While you may be able to get away with this in a buyer's market, it's generally not a good practice to get into. On one hand, it often sets a bad tone for the negotiations because it makes the sellers think that you're taking advantage of them. On the other, it gives them the option of picking and choosing which repairs they'll agree to undertake. (Here's a hint: They rarely pick the expensive or important ones.)
Instead, it's a better idea to narrow your focus to the repairs that are most important to you. Typically, these will be the most extensive repairs or the ones that will have the biggest effect on the sale price. By zeroing in on only the repairs that are most important, you'll ensure that they'll become the focus of the seller's response, making it more likely you'll get what you want in the long run.
Understand that the seller is not obligated to make repairs
Ultimately, the seller is not required to make any repairs. Often, they'll work with you because they don't want to go through the hassle of putting the home back on the market, but it's important to realize that any negotiation on their part is more of a show of good faith rather than a hard-and-fast requirement.
The one exception to this is anything that's found on the home inspection that would constitute a safety concern. While the seller still isn't technically required to make any repairs, if you decide to walk away from the home, they're required to disclose these types of issues to any future buyer who might go under contract with them. With that in mind, most sellers will agree to fix any safety issues just to avoid the hassle of having to put the home back on the market and secure another purchase contract.
Establish your bottom line
Lastly, as an investor, before you send your inspection negotiation addendum over to the seller, it's important to establish your bottom line. This figure represents how much you're willing to pay for the property in total. It should not only include the list price but also the cost of any repairs. it should represent your total investment in the property.
Once you establish your bottom line, you'll know where you stand in the negotiations. For example, if the sellers agree to give you a credit that meets your bottom line, you'll know that it's a good idea to move on with the sale. However, If they're unwilling to budge past a certain point that exceeds your bottom line, you'll know it's probably a good idea to walk away from the sale and to invest your earnest money deposit into another property.
The bottom line
Negotiating inspection repairs can be tough, even for experienced investors. With that in mind, feel free to use the tips above as your guide to the process. Armed with this knowledge and with the help of your real estate agent, you should be able to go into negotiations feeling confident about your decision-making skills, no matter what the seller's counteroffer has to say.
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