Sometimes, you’ll see a question in the BiggerPockets forums about whether it’s worth doing inspections when you get a property under contract. The answers are invariably yes for new investors, and usually for seasoned investors too—the reason being that you need to know what you are getting into.
There is a second equally important reason, though, especially when buying from homeowners or investors: You can usually get a credit or additional work done based on the results of the inspection report. This amounts to the second negotiation in any property purchase: Negotiating the Resolution of Unacceptable Conditions. What this is (and the name might differ in some states) is a demand from the buyer to the seller to either address a variety of defects or offer a credit to the buyer (i.e., reduce the sales price).
For example, here is one we recently received on a property we sold a few months ago (the numbers refer to the inspection report). Don’t bother reading it for now; we’ll work our way through it later. It looks like a lot, but most of what’s listed was relatively small and cheap.
We’ll return to how we responded and why, but for now, I’ll just note that not only did the inspection ensure the buyer wouldn’t be completely blindsided by something like all the floor joists having been torn apart by termites, but what we ended up agreeing to more than paid for the cost of the inspection (usually $300 to $500).
Most real estate sales have two negotiations: The first before the contract is signed, and the second during the “inspection period.” This is spelled out in the contract and usually 10 days for your typical 30-day close on a single-family residence, and 30 days on the typical 60-day close for an apartment or commercial building.
If you skip the inspections, you are concluding the second without getting a penny. You’re simply conceding that negotiation to the seller.
When Not to Use Resolutions
First, I should note that when buying a fixer “as is,” it’s expected there will be no such resolution. And back when we bought REOs from banks after the 2008 crash, they wouldn’t even consider one.
Of course, with such properties, I would still recommend doing an inspection, especially for new investors. If it’s worse than you anticipate, you can always back out of the deal. And there’s nothing stopping you from asking for a price discount. Just because the seller says “as is” doesn’t mean you can’t ask for a price reduction to buy what is, as is.
With larger deals, this is referred to as “retrading.” While not uncommon and often necessary, you don’t want to get the reputation as someone who gets a property under contract and starts trying to knock the price down further for no good reason, just because you are the only one the seller can negotiate with. It’s bad form and will eventually stain your reputation, making sellers want to avoid you.
The market is also something to consider. My wife and I bought our personal residence in September 2021. At the time, interest rates were at historic lows (we got 3%, which is higher than many others I know of), and it was an unparalleled seller’s market, with houses routinely getting multiple offers in the first week they were listed.
A house went more than $1 million over asking in the Washington, D.C. area, and another in Berkeley, California, did the same. Viral videos would show lines around the block to look at a house for sale. We made offers on eight houses—going over asking on five of them—before finally getting the one we did. And by the way, the only reason we got it was because the seller needed to move in exactly 44 days, and we didn’t care when we closed. We weren’t even the highest offer.
Needless to say, this was not the time to ask for repairs after getting a house under contract. Indeed, every seller at the time demanded we waive the right to even conduct inspections for our offer to be considered.
(In Kansas, buyers submit an In Present Condition Addendum, which can either permit inspections and the right to request repairs, permit inspections but waive the right to request repairs, or waive inspections entirely, and most states have something similar).
Had this been late 2008, it would have been the exact opposite: A buyer might as well have asked for a new roof, HVAC system, driveway, etc. during negotiations.
The post-2008 and the mid-2020 to mid-2022 market were exceptional. Typically, it will be a matter of degrees regarding how much to ask for and what to accept. Also, markets are local. Buyers can be more aggressive in places like Detroit and sellers stingier in places like Austin, Texas.
How to Approach Submitting a Resolution
The first thing I would recommend is to try to be quick. You don’t want to waste your time or the seller’s, so get the inspection scheduled right away, along with scoping the sewer line. You also need to get the resolution to the seller before your inspection period ends (usually 10 days for a single-family residence).
The next point is that an inspection report can be rather intimidating to a first-time homebuyer. With anything other than a new house, there will often be a lot of items. One recent inspection we had that went decently still listed 44 items on a 1,400-square-foot house built in the 1950s. The reason is that many of the items listed look something like this:
This “deal killer” could take upwards of 15 seconds to fix!
This will become a theme, but the size of the problem is much more important than the number of problems.
Still, there are probably two minds on this. But my opinion is that you should not ask for many things, but instead ask for the more expensive items to be fixed or to receive a credit for them. I’ll elaborate on this further when discussing tips on responding to a resolution, but the main reason is that I don’t want to bicker over small things, and I don’t want the seller to feel like they are conceding a lot in terms of price and the number of items to be addressed, despite the latter being close to irrelevant.
That said, definitely ask for more than what you want. Expect there to be some pushback. And including a handful of small items you can drop as a negotiating tactic is a good idea.
Don’t go crazy, but I’ve never seen a negotiation straight up end just because of a resolution being too ambitious. We once had an absurd resolution asking for a $50,000 price reduction on a house under contract at $180,000 for repairs that amounted to about $7,000. (And they wanted a firewall built between the garage and house, despite that it was “not required when the home was built.”)
Even amid that madness, we didn’t reject. Instead, we offered to do most of the work ourselves. They responded by countering for a $50,000 price reduction. We told them to send a cancellation.
Such wastes of time are unusual, though. Ask for more than what you want, and stick predominantly to the higher-cost items.
Three big-ticket items in particular are essential for the property’s livability and insurability and can almost always merit a substantial repair and discount: the roof, sewer line, and foundation. Here’s a look at each:
- Roof: A roof that has a few years left on it may be fine for a rental but is often uninsurable. This is the easiest big-ticket item to request and very often get.
- Sewer line: Whenever buying a house, always scope the sewer line. If there is a major offset, large amounts of root infiltration, or a break, you want to know about it, but you should also request a repair or credit. With roots, you can probably keep the line clean by regularly snaking it, so I would lean toward asking for a credit.
- Foundation: A lot of things could be wrong with a foundation, but if the inspector finds a problem, it is likely worth asking for a structural engineer to evaluate it (this could require asking for an extension to your inspection period). Remember that you want the property to be sellable once you own it, so it’s important for a structural engineer to give it a clean bill of health.
If you work with contractors you trust, it would probably be better to ask for a credit than to have them do the work. If you do allow the seller to do it, make sure to vet their contractors to make sure they’re legitimate. Have the property reinspected after the work is done to make sure it was done right, and get paid invoices or lien releases from the seller to make sure each contractor was paid and nothing will come back on you.
Lastly, I would also recommend a pest and dry rot inspection. It’s important to know, and you can almost always at least get a termite treatment out of the seller if there are signs of termite damage.
Responding to a Resolution
As you should when buying properties, expect the buyer to ask for more than what they want. Generally, you should be knocking off at least a few of their requests.
Of course, if the market is really slow or if you need to sell fast to raise cash and don’t want to risk the contract falling through, you should probably be more accommodating.
If you get an absurd resolution like that $50,000 credit we got, do not counter on price. The reason is when an absurd number is thrown out in a negotiation, it tends to create a psychological anchor that biases our perception of how much the cost will be to repair those items. You’ll almost certainly counter too high.
Either counter with the repairs you’re willing to do or tell them they need to submit a reasonable resolution for you to consider a counter. Don’t let the anchor stick.
Next, I would try to give the buyer all or most of the little things. More things feel like a better deal, even if what really matters here is the price of those things.
So, for example, on the resolution I showed earlier, here is how we responded (again, you don’t need to read all this—I’ll give you the highlights):
Generally speaking, the items we agreed to, such as a new GFCI outlet and cover for the electrical panel, were rather inexpensive. The costlier ones, such as removing the tree, installing insulation in the attic, and installing duct vents to the addition (it has a baseboard heater and window AC), were rejected.
They accepted our counter with no revisions, and I believe this was at least in part because we agreed to do a lot of items, even if the ones we did weren’t particularly expensive.
Sometimes, the buyer will ask for those big-ticket items I mentioned. And it’s hard to see how you can simply reject anything for the roof if it’s uninsurable or brush off the sewer line if it’s broken.
If the roof or sewer line problem is minor, we’ll reject a replacement. Maybe instead, we’ll offer a small credit or to snake the line or something like that. If not, we’ll usually offer to replace the roof as long as we increase the price—in other words, split the cost.
We justify this by saying that they knew the roof was older when they got it under contract and, therefore, shouldn’t expect a new roof. With sewer lines, we try to do the same, assuming it’s not completely destroyed and could be babied along with routine treatments and an occasional snake. A brand-new line is an upgrade and should be partially compensated.
So, for example, we may increase the price from, say, $150,000 to $153,000 and pay to replace the roof for $6,000.
As for the foundation, I want to nip this problem in the bud before it comes up. If there are any issues with the foundation beforehand—including minor ones, like some settling in old houses or the like—I get a structural engineer to look at it. Then, I do whatever is necessary to at least get the engineer to say the property is stabilized.
Having such a report in hand will usually stop demands to fix or compensate for foundation concerns before they come up.
Indeed, this can help get the property under contract in the first place. Any sign of a foundation issue causes most homebuyers to run for the door in fear. A structural engineering report stating whatever issue has been addressed both puts (many) homebuyers’ minds at ease and takes the foundation out of the equation for negotiations. It might be worth doing this with sewer lines, too.
Lastly, there’s whether to do the repairs yourself or offer a credit. If your contractors are busy on other projects or you are under the gun to sell, I would lean toward offering a credit. The same would apply if there could be a drawn-out permitting process that could delay closing.
On the other hand, if the repair needs to close (say, a roof replacement, so it’s insurable), doing it before closing is basically a necessity.
We do a lot of deals, meaning we tend to get contractors cheaper than homeowners, so the credit they would request is most often higher than the cost to us of doing the work. Assuming that’s true for you too, I would lean toward doing the work yourself if you can.
Lastly, if the buyer has a major preference, go with that, as everyone is willing to pay for (i.e., take less) to go with their preferences.
Final Thoughts
Property inspections are essential to figure out what’s wrong with a property before you buy it. We all know this. But they’re also a critical negotiating tool. Don’t skip them or neglect their importance. They can often be worth thousands or even tens of thousands of dollars. Trust me: That adds up in real estate real fast.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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