There’s another significant reason for this, especially when dealing with homeowners or other investors: inspection reports often provide an opportunity for negotiation. This second phase of negotiation, termed the “Resolution of Unacceptable Conditions” (though it may have different names in various states), involves the buyer requesting the seller to either address specific issues or offer a credit, effectively reducing the purchase price.
For instance, a recent inspection report for a property we sold a few months ago listed several issues (which we'll review later). While the report may seem extensive, most of the concerns were minor and inexpensive to address.
The inspection not only protects the buyer from unexpected problems, such as severe termite damage, but also ensures that the costs of resolving these issues are often offset by the inspection fees, typically ranging from $300 to $500.
In real estate transactions, there are generally two negotiation phases: one before signing the contract and another during the “inspection period,” typically 10 days for a single-family home and 30 days for multi-family or commercial properties.
Skipping inspections means forgoing the opportunity to negotiate based on the inspection findings, essentially conceding this part of the negotiation to the seller.
When Resolutions Aren't Appropriate
For properties sold “as is,” resolutions are often not entertained. This was particularly true when purchasing REOs from banks after the 2008 financial crisis. Nonetheless, inspections are still advisable, especially for new investors. If the property's condition is worse than anticipated, you can reconsider the purchase or negotiate a price reduction. Even in “as is” scenarios, asking for a discount remains a viable option.
In larger deals, known as “retrading,” it’s crucial to balance negotiation with maintaining a good reputation. Avoid becoming known for trying to reduce the price excessively after securing a contract, as this can damage your standing with sellers.
Market conditions also play a role. For example, during the September 2021 housing market, characterized by low interest rates and intense competition, sellers often required waiving inspection rights for offers to be considered. Conversely, the market conditions post-2008 and during the mid-2020 to mid-2022 period allowed for more aggressive negotiation.
Approaching Resolutions
Act swiftly by scheduling inspections and sewer line scopes as soon as possible, and submit any resolution requests before the inspection period ends.
Focus on critical areas such as the roof, sewer line, and foundation. Major repairs in these areas are often essential for the property's livability and insurability, and they can justify requesting substantial repairs or credits:
Roof: If the roof has limited remaining life, it might be insurable but could need replacement or significant repairs.
Sewer Line: Always scope the sewer line. Major issues such as significant offsets or breaks should be addressed, possibly through a credit if the line can be maintained with regular cleaning.
Foundation: Foundation issues should be evaluated by a structural engineer. Ensure the property is stabilized to avoid future negotiation issues.
When considering whether to conduct repairs or offer credits, weigh the benefits of completing the work yourself versus providing a credit. Often, handling repairs directly can be more cost-effective, especially if your contractors offer better rates than those typically available to buyers.
Finally, align with the buyer’s preferences when possible, as it can facilitate smoother negotiations and potentially lead to a better deal for both parties.
In Conclusion
Property inspections are vital not only for uncovering potential issues but also as a powerful negotiating tool. Neglecting them can result in missed opportunities for significant savings or valuable concessions. In the fast-moving world of real estate, the impact of these inspections can be substantial.
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