It’s a toss-up whether the home inspection or the appraisal induces more nail-biting. Homebuyers, sellers and the agents involved await the results of both with a mixture of anticipation and fear. The latter, at least statistically, is unfounded. “Nationally, [only] 3.9 percent of sales failed in 2016,” according to Samantha Sharf at Forbes.
Felipe Chacon from Trulia says that most failed home sales usually involves first time home buyers. Birmingham Alabama, luckily, is on the low end with less than 2% of home sales failed in 2016. These also tend to be older homes that usually come with scary inspection reports with issues that first-time homeowners have never experienced. When faced with problems that the home inspector turns up, you, as the buyer, have several options.
Choose Your Battles
Understand that there are some repairs, such as electrical, roof, the HVAC system, and plumbing, that you can reasonably expect the seller to make. In fact, anything that presents a health and safety concern or that negatively impacts your use of the home is not only something that the lender may require but that, should you walk away from the purchase, the next buyer will expect to be repaired as well.
It’s the little things, though, that bog down transactions, sometimes bringing them to a halt. If you really want the home, ignore the small stuff and fight for what actually matters. Items to ignore include anything of a cosmetic nature and problems that are inexpensive to remedy. Save your big guns for the major repairs. For instance, demand repairs to anything that presents a danger to health and safety, such as faulty wiring or mold.
What Are Your Options?
Ask the seller to make the repairs
When faced with major repair or replacement costs, many homebuyers ask the seller to make the repairs before the close of escrow. Often, sellers balk at the request, but once they’re reminded that the next potential buyer will most likely make the same request, they relent. If the seller has already reduced the price to accommodate the repairs, then the buyer will have to decide if they are willing or can afford to do the repairs after the sale.
Remember, home warranties will cover older systems should they fail. However, it is very important that the purchaser understand the limitations of the home warranty they choose.
Ask the seller for a credit
Ask that he or she credit you with the cost of the repairs at the close of escrow rather than ask the seller to make the repairs. This way, the seller avoids the hassle of having to hire a contractor and the inconvenience of home repair work happening while he’s trying to pack up for the move.
Note that lending laws do not allow the seller to write a check for the repairs at the time of closing (not the case for cash sales). Therefore, allowances for repairs can only be given from seller to purchaser via seller concessions for closing costs and/or prepaid items, such as insurance, taxes and prepaid interest. How does this help the buyer pay for repairs like electrical issues? Closing costs and prepaid items are typically paid out of the purchaser's cash reserves, the same cash reserves that can help with repairs after the sale.
If the type of loan a purchaser is getting is FHA, FHA will only allow the seller to credit the buyer 6 percent of the sales price. But, if the problem has to do with obvious health and safety issues, the FHA or VA appraiser might note the repairs as a condition of the sale. If that is the case, then the lender would require the work completed by a qualified contractor before the close of escrow by the seller.
Reduce the purchase
Ask your agent to negotiate a reduction in the originally-agreed-upon purchase price reflecting the deduction for the cost of the repairs. You’ll need to get bids from contractors to determine the cost of fixing or replacing whatever is at issue. This option depends on your current cash flow. While it lowers the cost of the home, it does nothing to put money in your pocket. So, before exercising this option, determine if you have the funds to do the work. A combination of the above options is also on the table.
A combination of the above tactics is also an option when negotiating repairs.
Switch your financing if you’re using a FHA-backed loan
In a worst-case scenario, say the repairs are greater than you could imagine or the seller can afford or is willing to make and you still want the house, you will need to contact your lender to find out if you can switch to their 203k program. This loan type rolls the cost of the repairs into the mortgage. You’ll, in essence, be financing the repairs but only make one payment every month.
The property will still need to appraise with the repairs added to the purchase price. Before considering this option all parties need to be aware that a conventional 203K program or an FHA 203k program is a bit complicated and takes more time. It will significantly slow down the purchase process so you’ll also need to ask the seller for a later closing date. Be sure your lender is well versed, almost an expert, in this loan product. Otherwise, you will be in for a big headache without an expert to help you navigate to requirements.
One problem you may run up against with this option is that the seller is under no obligation to cooperate with your efforts to obtain financing that differs from that stated in the purchase agreement. There is a risk that the seller may cancel the sale if time is of the essence. Be sure that the revision in loan type and timeframe is all negotiated at the time of inspection.
It’s important to work closely with your real estate agent on inspection problems, requests, and remedies.
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