Tips and Traps When Negotiating Real Estate: Buyers Who “Set Up” Sellers

Leverage the Inspection Report – Buyers Who “Set Up” Sellers

Buyers can “set up” sellers, although it is not principled and if the seller finds out about it, can cause the deal to be lost or make the negotiations much more difficult. As a seller you should try to be aware of these “set ups.”

Joan found a home she wanted to buy. It was owned free and clear by two elderly people who were planning to move into a much smaller condo. Joan gave the house a thorough inspection on her own. Since she had a degree in architecture, she had an excellent feel for what might be wrong with a property. She detected a serious problem. During Joan’s inspection, she noted that the house followed the steep slope of the hill on one side. In other words, the house on the west side, where the hill fell away, was actually lower than on the east side. This had resulted in some subtle stress cracks in the foundation and quite a few small cracks on the walls inside. However, the elderly sell­ers had lived there for years and, as a result, had never noticed the gradual changes of the property. They felt the relatively minor cracks in the interior walls were due to “natural settling.” Their real estate agent didn’t realize there was a problem either.

Joan made an offer. But instead of bringing her concerns into the open, she negotiated the best price as if the house had no defects.
She did, however, insist on a professional home inspection and made the deal contingent upon her approving the report. The sell­ers, feeling all was well, congratulated themselves on a sale and turned around and bought a condo they had been eyeing.

Joan hired a structural engineer to inspect the property, and he quickly discovered the defect and noted it in the inspection report.
Then Joan called out the most expensive construction company in the area to give a bid on repairs. Finally, armed with the report and the bid, she called on the sellers.

Joan’s bid for repairs was fully a third of the sales price! The sell­ers were shocked. But the professional inspection report had been conducted by a highly reputable inspector, as their own agent noted. And the construction company that gave the bid was one of the best in the area. So they felt they could not reasonably challenge the report or the costs of repair.

Further, by now the sellers had committed to purchasing another home. If they were to back out of Joan’s deal, they would lose the smaller retirement condo they wanted. Finally, they felt that no mat­ter who bought their house, they would have to reduce the price substantially. (The alternative of having the work done themselves was simply too overwhelming for them.) In the end, they agreed to a one-third price reduction.

Joan quickly bought the property and moved in. She’s still living there and hasn’t done any repair work. After all, there was nothing dangerous about the condition. She has patted herself on the back many times about her shrewd investment. As for the sellers, they were out a considerable amount of money that they had counted on using for their retirement.

The “Above Board” Approach

On the other hand, Joan might have noted the problem with the house at the time she made her offer. Indeed, she might have made a lower offer initially because of it.

As a result, the sellers would have been made aware and might have hired their own inspector to check it out. Further, they might have gotten bids from several contractors that could have been sig­nificantly lower than the bid Joan got. And because this would have been done during the initial negotiations, they wouldn’t have com­ mitted to buy another house and would have felt free to turn Joan down if her offer was too low. In short, if Joan had been strictly straightforward, she probably would never have been able to lever­ age the price as low as she had based on the inspection report.

All of this makes it sound as though Joan was a shrewd buyer. However, 1 do not personally approve of her approach and do not advocate or condone it. Further, I strongly believe, “What goes around comes around.” In my own life, I’ve witnessed a certain sym­metry, justice, balance, or whatever you might want to call it, to the universe. If you cheat someone, in my experience, that will come back to haunt you.

In Joan’s case (obviously not her real name), this did happen. I saw her nearly 10 years later when she was trying to resell the prop­erty. However, by then the erosion on the side of the house with the steep slope had accelerated, and much of the foundation had severely cracked. There was no mistaking to anyone who looked that there was a severe problem here. Indeed, the real estate agent, seek­ing to protect himself from any liability, called in a city inspector who promptly condemned the house!

The upshot was that while the lot remained valuable, the house had to be completely torn down. In the end, Joan got less for the property, adjusted for inflation, after 10 years than she originally paid for it.

TRAP

In this true example, Joan really did take advantage of elderly sellers, although probably not in a way that could get her into serious trouble. However, in general, especially when dealing with the elderly in real estate, it is important not to exert “undue influence.” That sim­ ply means that you should not take advantage of any­ one because of your relationship with him or her.

TIP

If you get a better deal because of a defect in the house, get the defect fixed. For example, although Ted and Sally got $10,000 off the price because of a prob­lem roof in our earlier example, Ted did fix the prob­lem, even though he did it for far less money. If Joan had taken care of the settling problem when she pur­chased the house, she probably would not have had a major problem years later.

The Bottom Line

The home inspection report can be a useful negotiating tool to leverage price in a real estate deal. However, it can be a double-edged sword. Sometimes it can help the buyer . . . and other times the seller.