Tips and Traps When Negotiating Real Estate: How Leveraging the Inspection Report Works

Leverage the Inspection Report – How Leveraging the Inspection Report Works

It’s important to understand that today virtually all home transfers include a professional home inspection. As noted earlier, the reason for this is twofold. The first and most obvious reason is that buyers want a better handle on what they are purchasing. Most purchasers simply do not have the knowledge to determine the condition of a property. Therefore, they are willing to pay an inspector to take a look and give them a report. The second reason is to negotiate a bet­ter deal.

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The inspection report is often made after the deal is signed. This means that when negotiations take place, n typically, the true condition of the property may be unknown.

Therefore, savvy buyers make the deal contingent upon their approving the inspection report. If the report comes back negative, they can back out of the deal with no harm to themselves. Sellers, as noted in Chapter 3, can help protect themselves by putting a time limit on the buyer’s approval. The buyer has 7 or 10 or however many days to approve the report, or else the deal is gone and the seller can accept other offers.

The inspection report, thus, becomes a valuable discovery tool for both buyer and seller. It also can be a vital negotiating tool. But to see how, we must first remember that the value of a home is deter­ mined to a large extent by the condition of the physical structure itself. (The lot and location are the other parts of the value.) Therefore, when you buy a home, the price you’re paying includes, presumably, a house in good shape (except for problems as dis­ closed by the seller).

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In fact, when you, as a buyer, make an offer and negotiate a sale, you assume the house is okay except for whatever defects the seller discloses. Defects, which can be problems as severe as foun­dation cracks or as minor as chipping paint, change what you arc buying and, hence, affect the price you are (or should be) willing to pay.

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In most states today, a seller’s disclosure statement is given at or near the time the sales agreement is signed. In California, for example, the seller gives the buyer a disclosure statement (describing all defects in the prop­erty) upon signing the sales agreement. The reason is that in California the buyer usually has three days after receiving the disclosure in which to back out of the deal with no penalty. The sooner the buyer receives the dis­ closure, the sooner the backing out period ends.

How to Leverage during Negotiations

There are two occasions when an inspection report can leverage a better deal. The first is when the deal is originally negotiated. Usually this happens when the seller has previously had the house inspected.

If the seller has an existing inspection report, it may reveal defects or problems. As a buyer, you may point these out and use them as arguments to leverage a lower price. On the other hand, however, the seller may already have taken this into account and may be asking a lower price. As a buyer, you may feel more off the price is justified.

On the other hand, a seller can also use an inspection report as leverage. For example, the seller may point out that based on an existing inspection report, which revealed few or no problems, the buyer shouldn’t hesitate to offer more for the property. In a sense, the buyer already has assurances of the soundness of the home. (A savvy buyer, as noted above, will still insist on his or her own report, with a contingency referring to it in the sales agreement.)

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A seller with an existing inspection report can balk at having a buyer get a new inspection with some justifi­cation, saying it will just slow down the deal. Further, if the buyer insists on an inspection contingency, the seller with an existing report may insist it’s a deal point and ask for concessions elsewhere. Nevertheless, these reports have become so common that in most instances the seller simply accepts their necessity.

Renegotiating

The second occasion when an inspection can be used to leverage a better deal is after the report has been made. It’s at this point that negotiations may actually be reopened.

Sally and Ted were buying a home that the seller represented to them as being in “perfect condition.” It certainly looked sharp, with beautiful landscaping in front, a new paint job, and a pleasing rustic backyard. But they insisted on a professional inspection and made the deal contingent upon their approving it. The seller said, “Sure.” After all, the seller felt the property was terrific.

Sally and Ted hired a person who had previously been a building inspector to conduct the inspection for them. He had been around construction all his life and, because of his experience in his previ­ous profession, claimed to know just what to look for.

The inspection took about four hours, probably twice as long as most, and revealed a whole laundry list of problems, some minor, some more severe. For example, the gas forced-air furnace had a hole in the heat exchanger. It would probably have to be replaced.

The plumbing under the sink in one bathroom was nearly rotted out and also would have to be replaced. Worse, the chimney had cracked and would need to be rebuilt. But, worst of all, the roof, though it appeared fine from the ground, was wood shingle, and many shin­gles were missing. The inspector pointed out there were many cracks and holes that could be seen when looking up from underneath in the attic. He recommended having the roof replaced.

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The seller was aghast at the report and, quite frankly, so were Sally and Ted. They had thought they were buying a home in great con­ition. Now it turned out that the house had severe problems. Sally and Ted said they wanted to get a handle on how much cost was involved, and they hired several contractors to come in and quickly give them bids on repair and replacement work. The total was in excess of $48,000.

Now Sally and Ted went back to the negotiating table. They said they wanted the work done and the seller to pay for it. The seller stubbornly refused. He said it was too much money. He simply wouldn’t do it. Let them back out of the deal. He’d sell it to some­ one else.
Sally pointed out that in any future deals the seller would have to reveal the current inspection report, and any other buyer would be
just as likely to want the work done. Further, Ted casually mentioned that if the seller hid the report, he was opening himself up for a tremendous lawsuit from a new buyer. The seller decided to rethink his position. Eventually, the seller had the chimney, furnace, and plumbing fixed (for substantially less than Sally and Ted’s original estimates). And he gave them $10,000 off the price for the bad roof.

Once the deal went through and Sally and Ted moved in, Ted got several flats of shingles, went out on the roof, and over a weekend made repairs himself. The total cost was under $500. Of course, it was not a new roof and would eventually need to be replaced. But it would be usable for several more years without leaking. Two years later they resold the property and revealed that the existing roof was old and weathered, but that it did not leak. An inspection subse­quently showed that there were no shingles missing and no light coming through cracks visible from below (thanks to Ted’s efforts). The next buyer bought the property without quibbling over the roof.

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The important point here is that the inspection report required the negotiations to reopen. The report allowed the buyers to con­vince the seller to lower the price. The inspection report thus became a vital tool for the buyer in leveraging price.

Preinspected Homes

As noted above, sometimes sellers will have an inspection prior to finding a buyer. They may even advertise, “Home is preinspected.”

Often this happens when there is a deal that falls through and a would-be buyer paid to have an inspection. The seller now has a copy of that report and makes it available to the next would-be buyer. (Normally, the seller should make all such reports available.) The seller usually hopes the buyer will accept this report and sign off on a deal without contingencies.

The problem here is that if you’re the buyer, you really don’t know under what circumstances the previous report was made. Did the inspector do a competent job? Did the previous would-be buyer go along and ask questions and point out potential problems? (Often the verbal explanations of a home inspector are the most revealing and helpful part of the process.) Was the inspector a relative of the seller?

Therefore, I always suggest that you have your own inspection done (and pay for it—usually around $350) along with a contin­gency pertaining to it. Yes, accept a previous report and read it with a grain of salt. But, until your own inspector is out there, and you along with him, you really don’t feel that you have a true handle on the property’s condition.