Negotiate home seller does repairs or a price drop?

Congratulations! You had your offer accepted. The next step of the process is usually doing the home inspection. Fortunately, you were able to avoid a competitive bidding war where you had to waive the inspection by doing a pre-inspection or had to rely on the pre-listing inspection report provided by the seller.

Once you have completed your inspection of the home, you will have to make a decision as to how to proceed. If you discover issues during the inspection you will have to decide between trying to get the seller to agree to do those repairs before closing OR trying to negotiate a price reduction by an amount that would cover the cost of those repairs post-closing. 

Typically, following an inspection, the home buyer responds to the seller with one of the following four options:

1.  Agrees to buy the home as-is and not ask the seller to do any repairs.
2.  Fail the inspection, withdraw their offer, get their earnest money back, and go look for another home.
3.  Request that the seller do certain repairs before closing.
4.  Request that the seller reduce the sale price or give a credit toward the buyer's closing costs.

 If there are issues with the home that need repair but the buyers still like the home, they will usually pursue the 3rd or 4th options: request that the sellers complete repairs before closing or request a price drop/closing cost credits.

So, assuming the seller agrees to your request to complete repairs before closing, what are the pros and cons of going this route?

The advantages of having the seller do repairs before closing.

The repairs are completed before closing.

By having the seller do the repairs the buyers can move into the home knowing they will not have to address those issues. Nuff said!

It's a bigger, more expensive repair than expected.

Say, for example, the buyer requested that the sellers retile a shower wall because of missing tiles and a leaking shower head. 

However, when the tile guy removes the old tile, he discovers that the whole wall is covered in toxic mold and that there's a plumbing leak above the wall that will now require a plumber, a mold abatement contractor, a drywall installer, and of course, the tile guy. And who's paying for all of this...the seller. Not you, the buyer.

Fixes issues that are required by the lenders so the buyer's loan can be approved.  

As part of the buyer's loan approval process, the lender will require that an appraiser visit the property to determine its current market value and to gauge its overall condition. The lender wants to know if it is lending money on a solid home or an over-priced lemon.

If there are major repair issues like a roof that is obviously at the end of its lifespan, the appraiser will report that back to the lender. The lender will probably require that those issues be addressed BEFORE closing. This applies to all types of loans including conventional loans.

For lower downpayment loans, like FHA and VA loans, the requirements can be more stringent and the lender can require other repairs to be addressed before closing. These include mold, missing handrails, peeling lead paint, standing water in the crawl space, and non-functioning HVAC systems.

Completion of these repairs means that the buyer's loan can get approved and the sale can close successfully. The seller probably won't be too happy, but the buyer definitely will be.  

The buyer just doesn't have the money to do the work.

A lot of buyers, especially first-time homebuyers, have to push their finances to the max to close on a home. After closing day, their bank accounts are usually on the anemic side and most buyers wouldn't be able to afford to do any significant repairs like replacing a leaking roof or a spluttering furnace.

Potential disadvantages to asking the seller to do repairs before closing.

Here are some potential reasons why requesting the seller to take care of repairs before closing day doesn't always work out.

The seller does the repairs but does them badly.

When a buyer negotiates home inspection repairs, the buyer needs to be very specific and detailed as to how the repairs are to be completed. If the buyer submits a vaguely worked repair request then the seller is likely to provide them with the cheapest fixes possible. 

The buyer should get a quote from a licensed and insured contractor with a detailed description of the scope of the work and require that the seller use that contractor to do the repairs. Don't give the seller giant loopholes that they can use to put a band-aid fix on the repairs.

There's not enough time to complete the repairs before closing.

Say, for example, the roof needs replacing and the seller agrees to replace it. However, it's the middle of summer and every roofing contractor for miles is booked solid.

The sale is scheduled to close in 4 weeks but the first (reputable) roofer is not available for another 5 weeks, then obviously that's not going to work. 

One potential workaround in this situation is to do an Escrow Holdback where part of the seller's proceeds from the sale are held by escrow and released to pay for the work when completed after the sale closes.  

However, some lenders may not agree to an escrow holdback so don't rely on this as a backup plan.

The sellers say they don't have any money for repairs (not quite true).

Many sellers will plead poverty and say they just don't have the funds to pay for any repairs before closing. The seller's bank account might genuinely be on the leaner side or it might have plenty of cash sitting in there. There's no way of knowing.

However, the seller probably has equity in the home and will walk away with a lump of cash at closing. And that cash can be used to pay for repairs. Some contractors are willing to do repairs before closing and wait to get paid by the seller after closing from the proceeds of the sale. Plus you could ask for an escrow holdback as mentioned above (if the lender agrees).

If the seller has no equity in the home or much sitting in their checking account then they really can't afford to do those repairs.

The seller agrees to do the repairs but doesn't actually do them.

Say the seller agreed to install a new furnace before closing. The day before closing, the buyers and their agent do their pre-closing walkthrough of the home and discover that the old clapped out furnace is still there. It's stress time!

First of all, sorry, but the buyer and their agent should not have waited until the day before closing to find out that the furnace had not been replaced. I know, I'm not helping.

The inspection response should have (1) specified a completion date for the work that was well before closing, (2) requested that the buyer be sent a copy of the paid invoice for the work, and (3) gone back with their inspector to make sure the work was done properly.

Regardless, what's the buyer supposed to do now?  The sale is closing tomorrow. What recourse do they have? 

Can the buyer delay the closing or get out of the contract? That will depend on the language in the sales contract which will vary from state to state and potentially on specialized forms used by different real estate brokerages.

The ability to delay the closing may also depend on the size of the issue and implications of not fixing it...like a leaking roof or a non-functioning furnace when it's snowing outside. In these situations, for an FHA or VA loan, the lender will probably not allow the sale to close until the repairs have been completed.

For smaller repairs that the seller agreed to do but didn't, it might be a case of SOL for the buyer and learn from the experience.

Alternatives to requesting that the seller do repairs.

If following the home inspection, the home buyer decides not to ask for seller repairs, there are two ways the buyer can "save" money: (1) negotiate a sale price reduction and/or (2) ask for their closing costs to be paid for by the seller.

Negotiate a price drop after the inspection.

If the buyer doesn't want the hassle of dealing with trying to get the sellers to do repairs, scheduling contractors for quotes, and ensuring that the repairs will be done properly, then negotiating a sale price reduction is the way to go.

Some home buyers have big plans as to what they want to do with the home after closing, like ripping out the dated kitchen and bathrooms and doing a major model. They will probably just leverage the inspection report to get the owners to reduce the sale price and are not interested in getting repairs done.

A lower sale price means lower mortgage payments but needs to be a significant price drop to make a much of a difference. 

Credit toward the buyer's closing costs.

For a buyer with smaller coffers, particularly first time buyers, instead of asking for a price drop, they might push for the seller to pay some of their closing costs.

Besides the downpayment, buyers will have closing costs that include title and escrow fees, loan origination and appraisal fees plus prepaid taxes, insurance, and HOA dues. And all of that comes out of the buyer's pocket.

By negotiating with the seller to pay some of those closing costs, the buyer has to bring less cash to closing and keeps more in their pockets. After closing, the buyer can then use that saved money to do the needed repairs themselves. Plus you will have more control over how the repairs are done.

The amount the seller is allowed to contribute toward the buyer's closing costs will depend on the type of loan and how much the buyer is putting down.

For example, the limit for conventional loans depends on how much you're putting down: If your down payment is less than 10%, the seller can contribute up to 3%. If your down payment is between 10% and 25%, the seller can contribute up to 6%. If your down payment is more than 25%, the seller can contribute up to 9%.

The limitation is that that some repairs, like a new roof, might cost a lot more than the closing costs the seller is offering to pay. Plus, if a new roof will cost $15,000 but your closing costs are only $7,000, you can't ask for $15,000 in "closing costs" from the seller. 

To summarize regarding whether to negotiate post-inspection repairs or a price drop. Post-inspection negotiations can be as stressful as getting your offer accepted in the first place. The home buyer needs to decide if they would be better off pushing for a sale price drop and doing the repairs themselves after closing OR have the ask for the seller to take care of them before closing.  Much of that will depend on the actual repairs and the cost of doing them. Every sale is unique. Good luck!

Additional useful resources related to home inspections and negotiation when buying a home.

Advice on Controlling Your Emotions when Negotiating a Home Purchase from Karen Highland. Buying a home can be stressful to say the least and most buyers find negotiating super stressful. Here's some advice that might help.

Why Escrow Holdbacks Can Be Useful When Negotiating Inspection Repairs from Paul Sian. If the repairs can't be completed before closing or the seller doesn't have the money to do the repairs before closing, one option is to use an escrow holdback. 

Which Repairs  Should You Push For after a Home Inspection? from Sharon Paxon. This article provides advice on which repairs are worth pursuing. Ignore the small items and focus on any major, expensive repairs. And be reasonable!