If you've bought and sold a few homes in your lifetime, you may already know some of this information. However, I've found that those who are buying or selling for the first or second time may not have bumped into the inspection report and repair negotiation challenges in an existing home sale. Let's work our way through a make-believe, but all too often true life, example.
John and Mary are first time home buyers. Sue and Jim are about to sell their first home to move up to one that's larger to accommodate their family. So, from here forward, we'll refer to John and Mary as the Buyers, and Sue and Jim as the Sellers.
The Purchase Contract Negotiation
John and Mary are Millennials, and they are very Internet savvy. They've done a huge amount of research in their local real estate market. They have been subscribing to new listing alerts for months from a local real estate agent's website. They have followed home price news, and they have a pre-approval letter and have a pretty good idea of the mortgage they can afford at current mortgage interest rates.
These Buyers have also visited sites like Zillow.com, where they can see sales price histories in the neighborhood and "Zestimates" of value. John even purchased a couple of first time buyer books from Amazon, and he is ready to "go into battle" to cut a good deal on a home. He may have even read some of my advice to buyers on how to approach home purchase negotiations from a position of strength to get a better deal.
Our Sellers are in their first home, and they are relying on the home valuation their real estate agent calculated and the listing price suggested for the current market. They even allowed a 3% fudge factor for negotiations with the buyers so everybody can "win" in the deal. They have been home shopping, and they are using their expected cash from their sale to determine the down payment they can afford and selecting a home accordingly.
Our Buyers and Sellers go into contract negotiations with their real estate agents at their side, and both are motivated. John and Mary love the home and can visualize their weekend parties on that back deck. Sue and Jim have a home pre-selected that they love, and selling soon is their goal so that they don't lose it.
Everyone came in pretty prepared, or so they thought, and they negotiate a selling price just below Sue and Jim's best at a 4% discount to listing price. Sue and Jim are not thrilled, but they see enough money leaving the closing table to buy the home they want. John and Mary are happy, as they feel they cut an aggressive deal in the current market.
The Home Inspection Report & a Problem
We're talking here about a six year old home, so it has many of the features that our Buyers wanted. However, it's also just old enough to be showing some "normal wear and tear," as well as a couple of other issues. The home inspector's job isn't to alarm or exaggerate, but it is to find everything wrong and report it to the Buyers. A few of the issues on the report that led to our problem situation included:
• The central air conditioning outdoor unit had a fan motor bearing noise and vibration, meaning a need for a motor replacement, around $300.
• The gas furnace hasn't been regularly serviced, and it needs extensive cleaning and some wiring work, as they have been scorched by flame rollout.
• There is a lot of outdoor painting work required to avoid wood rot, as paint is flaking around a lot of the trim.
• The outdoor wood deck needs oiling and some of the deck planks replaced, as they have dried out and cracked.
Those are a few of the bigger issues, and the inspector estimates the cost of those repairs to be in the neighborhood of $2,000. Of course, John and Mary are surprised, as they really didn't notice these issues in their loving walkthroughs. Sue and Jim didn't really expect this, as they've been fine living in the home and haven't experienced any issues of livability.
The problem is that Sue and Jim are below their bottom line, and giving up this money for repairs will rule out the home they love and wanted to buy. John and Mary are maxed out with down payment and mortgage for the home they love, and these repairs seem absolutely necessary, but unaffordable without more debt.
One of the major reasons for deal collapse is repair negotiations, so keep this in mind whether you're buying or selling. Expect condition issues and you'll be better able to plan for them.